India WPI Inflation At 10 Month High, Diminishes Rate Cut Hopes

 
on October 15 2012 5:24 AM

India’s headline inflation in September rose at a higher than expected rate to 7.8 percent, touching a 10-month high, diminishing chances of interest rate cuts by the RBI.

Wholesale Price Index rose to its highest since November 2011 due to a steep hike in fuel process as the government cut fuel subsidies last month. The analysts on average were expecting the WPI to grow at 7.77 percent from the 7.55 percent growth recorded in August 2012.

The rise in the WPI has been driven mainly by the fuel prices as the fuel and power index weighing 14.91 percent on the inflation index rose by 4 percent while the index for manufactured food products increased by 1.2 percent.  Minerals went up by 4.9 percent while Non-Food articles group declined by 2.1 percent.

“In some ways, the increase in the wholesale price inflation is largely attributable to the increase in fuel price. One has to take that into account. One has to interpret the increase carefully because the increase in fuel prices was planned and administered. Therefore, by and large, the non food manufacturing inflation appears to remain the same,” said C Rangarajan, chairman, Prime Minister's Economic Advisory Panel (PMEAC) in an interview to CNBC-TV18.  

RBI will decide on the rate cuts in its policy meeting on Oct. 30. There have been strong pleas from the markets and industry to cut the interest rates to help the struggling economy to recover, but RBI so far has refused to ease the monetary policy stating that the inflation is well above the comfort levels.

Finance Minister P Chidambaram on Sunday had urged the RBI to take calibrated risks and to reciprocate government attempts for economic recovery by rate cuts.

However, the high inflation figures are expected to prompt the RBI to keep interest rates unchanged.

"Today's inflation number significantly reduces the chance of a repo rate cut in the next policy (review)," said Jyotinder Kaur, economist at HDFC Bank in New Delhi, told Reuters.

"But we see the Reserve Bank of India reciprocating to the government's recent reform measures by yet again cutting bank's cash reserve ratio," Kaur added.

"Inflation number is very ugly. Overall the inflation situation is going to worsen until end-December," said Rupa Rege Nitsure, the chief economist of Bank of Baroda in Mumbai, adding that she expects the RBI to maintain the key rates unchanged until the fourth  quarter of the financial year.

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