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It’s difficult to tame inflation in India. Sometimes it’s too much rain that drives prices up and other times it’s the lack of it. After falling for several months, the Wholesale Price Index (WPI) print for the month of July has come in at 5.8%, way ahead of consensus estimate of five%. The WPI index was at 4.86% in June and 7.52% in July, 2012.
Even though most other components also inched up, increase in fuel and vegetable prices have largely contributed to headline print’s upward move. Food inflation (primary and manufactured) has risen to 9.5% year-on-year from 8.6% in June. The timely arrival of rains proved to be a challenge as it disrupted supplies, resulting in vegetable prices shooting up by 46%. Onions, another key staple food item, is up 146% year-on-year. After staying below 10% for four months, the food price index has inched up again.
With the government increasing the prices of fuel on a regular basis, the fuel component increased 11.3% in July from 7.1% in June, driven largely by higher prices of diesel and petroleum. Manufactured products inflation too has moved up to 2.8% YoY from two% levels seen in June. Sonal Varma, economist at Nomura, believes the rupee’s weakness is resulting in a sharp rise in input costs, which explains a large part of today’s surprise. “While there are near-term upside risks to WPI inflation from higher food prices and a weak currency, we do not expect a sustained rise in WPI inflation due to very weak demand,” she adds.
Not everybody is as optimistic as Varma. The headline print has not overshot due to last year’s lower base. A supportive base has kept the WPI range bound around five% in the past few months. In the coming months, inflation may be driven up by factors like higher import duties, increased government spending and stronger rural consumption.
Dhananjay Sinha, strategist at Emkay Global, believes rising cost momentum and fading base year benefit will spike up WPI inflation substantially. Going by the inflation trajectory over the last two months, inflation for the full year could average between six and seven%, which is well ahead of RBI’s 5.5% target. It goes without saying that if inflation trajectory continues to move up, rate cuts will be delayed even further. Corporate India does not expect the rate easing cycle to resume before FY15.
