Reserve Bank might raise WPI inflation estimate

Economists feel falling rupee and its effects make it inevitable fairly soon

Economists are in the process of revising their Wholesale Price Index (WPI) inflation estimates upwards  for 2013-14. And, feel the Reserve Bank of India (RBI) might also do so, with the rupee’s steady slide against the dollar.

The rupee’s recent strengthening is considered temporary by them. Reserve Bank of India Governor D Subbarao said on Thursday in Indore that it was difficult to say how long the external problems affecting the rupee would persist. He also noted inflation remained high and curbing it was the central bank’s most important task.

“The fall of the rupee by nearly 12 per cent since the beginning of May  has raised the rupee price of crude oil and will get reflected in higher inflation of internationally-linked fuels such as petrol. The weakness has also increased under-recoveries in diesel to Rs 10 a litre (as of July 8) from only Rs 2.50 a litre in April. If the rupee remains at current levels, the monthly diesel price hike will have to continue through 2013-14,” said Dharmakirti Joshi, chief economist, CRISIL, in a note to clients.

Also, he said, keeping in mind the fiscal consolidation agenda, the pressure to raise prices of other subsidised fuels such as cooking gas would also rise.

Input costs, particularly of imported raw materials, have risen significantly. As firms pass at least some of these cost increases to consumers, core inflation - measured by the CRISIL Core Inflation Indicator – will begin to rise again.

RBI’s monetary policy statement for 2013-14 said WPI inflation was expected to be range-bound at around 5.5 per cent. And, that it would try to bring inflation to five per cent by March 2014. This WPI projection, say economists, might be revised upwards soon. “Whether they will do it immediately or after the monsoon assessment, that depends,” said Rupa Rege Nitsure, chief economist, Bank of Baroda. Her projection for WPI inflation for 2013-14 is a bit above six per cent. Earlier, she was expecting 5.3 per cent.

WPI inflation fell to 4.7 per cent in May from 4.9 per cent in April. The data for June is due next week and according to Shubhada Rao, chief economist, YES Bank, it will rise to 5.1 per cent, driven by sharp upward movement in prices of primary articles. Rao also revised her 2013-14 WPI estimate upward, to six per cent from 5.75 per cent earlier.