Stubborn inflation tilts scale in favour of a rate hike

COIMBATORE: Stubbornly high inflation has tiled the scales in favour of a rate hike by the Reserve Bank of India (RBI) during the next monetary policy review, ratings agencies have said. Wholesale price index (WPI) inflation increased 7.52% year-on-year (y-o-y) in November (October 7% y-o-y increase) led by a 19.93% y-o-y inflation in primary food products and 11.08% y-o-y inflation in fuel and power.
Even the consumer price index (CPI) based inflation for October rose to 11.24% y-o-y (October 10.2% y-o-y growth). Crucially, core inflation, as measured by ratings agency CRISIL's core inflation indicator as well as non-food manufacturing inflation also rose marginally in November.
Though the overall WPI inflation would soften in the near term due to a decline in food inflation led by a drop in fruits and vegetables prices, it would still be at elevated levels and higher than the comfort zone of the RBI, experts said. "Momentum indicators suggest that while inflation in primary articles is likely to moderate in the coming months, inflation in manufactured products could accelerate further," CRISIL said.
"Despite dwindling growth, inflation and inflationary expectations continue to be high. It may push RBI to go for a rate hike and increase the repo rate (currently 7.75%) by 25 bps (or 0.25%) in the forthcoming review of monetary policy," India Ratings and Research said.
"Given the rising inflation-both at the retail and wholesale level-the RBI with inflation control as its prime objective, is set to hike the repo rate once again by 25 bps," CRISIL said. "With a weak rupee and rising fuel prices, margins of producers are under stress," it said. "The extent of rising input costs being passed on to consumers is likely to rise further, especially if household consumption begins to improve, following a normal monsoon, and a consequent increase in farm incomes," the agency said.