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Even as the Reserve Bank of India maintained status quo on policy rates due to uncertainty over the outlook on inflation numbers, economists don’t believe Wholesale Price Index (WPI)-based inflation would come below seven per cent by the end of this financial year.
Defending its stance, RBI said, “There are indications that vegetable prices may be turning down sharply... In addition, the disinflationary impact of recent exchange rate stability should play out into prices.”
However, economists still feel WPI inflation would remain elevated in the coming months. “Even if we go by RBI’s presumption of a likely decline in food prices, the remaining impact of rupee depreciation and continuous adjustment in diesel prices will keep the inflation high,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
She expects WPI inflation to be 7-7.5 per cent by March-end. Official data showed on Monday that WPI inflation was at a 14-month high of 7.52 per cent in November and had remained around seven per cent since August.
At its annual policy statement for the current financial year, RBI had said it would endeavour to keep WPI inflation at five per cent by March-end.
However, experts do expect easing of inflation in the months to come. “WPI inflation will soften starting December but how significantly it will decline will be crucial,” said Shubhada Rao, chief economist at YES Bank.
However, she says inflation by end-March would remain over seven per cent. “By March-end, we (expect) WPI inflation to be 7.5 per cent on an annual basis,” said Rao. She said this was because primary articles had taken overall inflation very high and the base effect would come into play in March.
Looking ahead, economists said growth would be crucial for inflation to subside. Indranil Sen Gupta, India economist at DSP Merrill Lynch, said inflation would come into a comfort range only by the second half of 2014-15.
“For inflation to come down significantly, the economy has to recover and we do not see any sustainable signs of that happening in the near term,” said Nitsure.
CRISIL Research is an exception on sub-seven per cent inflation by March-end. “We expect it to be around 6.5 per cent by end-March, primarily because while food inflation will come down, core inflation is moving up only marginally. Hence, overall inflation can come down around one percentage point compared to today,” said Vidya Mahambare, principal economist at CRISIL Research.
However, YES Bank’s research says the impact of a sharp decline in vegetable prices is likely to be somewhat diluted on account of a rise in prices for select food products and an increase in trading mark-ups by intermediaries.
“Going forward, the trajectory on core inflation is also unlikely to provide much comfort,” it said.
