India Inflation Up 1.21%
Wholesale Price Index (WPI) crept up by 1.21% over last year for the week ending October 10, 2009. After remaining in the negative territory for 3 months from June-August’09, benchmark inflation index registered a growth of more than 1% for the first time after May’09.
Rise in inflation is mainly led by the increase in prices of primary articles (weight 22.05%) which have grown by 8.27% over the year. Food articles, having a weight of 15.4% in the index have been the driving force. For the current week, fish-marine, moong and rice showed the maximum increase. Non food articles and minerals, other constituents of primary articles have declined marginally.
Fuel price index remained in the negative territory declining 4.68% over the year whereas manufactured products having the maximum weight of 63.75% grew by 2.94%.
Inflation, as measured by WPI, has been consistently moving upwards since June’09. This has been induced largely due to base effect of high prices last year. Increase in WPI is expected to gain momentum in the coming months as base effect wanes further. As per our analysis, taking the index figures for current week and projecting the same for the current financial year, rise in WPI is expected to touch 3% by October end, 5% by early December and 6% by late January. Add to this the perceived increase in prices of food articles due to poor monsoons and these growth rates can be seen coming at an earlier date. One factor which might comfort inflation wathcers is the manufactured articles. IIP has been growing at a good pace and it commands a good weightage of 63.7% which might keep the index in check but demand for manufactured articles could play a spoil sport.
RBI has kept an inflation target of 5% for the year 2009-10 and as this is expected to be breached a policy action from RBI is expected. RBI in this case has a dual role: managing inflation as well as facilitating growth. Timing of any policy response would be of critical importance in balancing the two contrasting objectives. RBI’s forthcoming policy announcement on Tuesday, October 27, 2009 would give important signals. Impact of the fact that WPI would be released monthly from the current weekly release also needs to be assessed.
What RBI will do would be closely watched but as of now latest WPI figures have pulled down equity markets and has raised concerns of an earlier increase in interest rates.
Keep watching this space for further updates and analysis of RBI’s actions.
Author: Praveen Bajaj, B.Com(H), MBA (SCMHRD)
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