RBI unlikely to increase policy rates
Dec 15, 2010

Author: PersonalFN Content & Research Team

(Source: Office of Economic Advisor, PersonalFN)

India’s Wholesale Price Index (WPI) eased to 7.48% in the month of November 2010 as compared to 8.58% in October 2010. When analysed with the data available last year during the same period i.e. November 2009, the headline inflation still appears elevated due to low base effect (last year in November 2009 WPI inflation was 4.78%).

Food inflation meanwhile for the month of November 2010 dropped to 9.41% from 14.13% in October 2010, but interestingly the index for food articles rose by 0.06%. Manufacturing inflation too witnessed a marginal dip to 4.60% for November 2010 from 4.70% witnessed in the month of October 2010.

Food items (both primary and manufactured food articles) have a weight of 24% in the WPI, on the basis of which inflation is calculated, while manufactured items (barring food products) have a weight of 55%.

In the month of November 2010, petrol & power inflation dropped to 10.32% from 11.02% in the previous month (October 2010).

Reacting to WPI data the Finance Minister – Pranab Mukherjee said, “I am hoping it to be around 6% by March. The moderation in pace of increase in prices, or the annual rate of inflation, was despite a 0.42% rise in the index in November, from October, indicating that the decline was more statistical, i.e., due to favourable base effect.”

Our view on inflation and interest rates

In our opinion the marginal dip in the headline (WPI) inflation seems to be momentary as going forward we may witness a rise in inflation due to global commodity rally (especially crude oil which has risen beyond $90 a barrel). However, food inflation will ease, due to favourable monsoon this year. Overall we expect WPI inflation to mellow down to 6.50% - 7.00% by fiscal year end.

As far as the interest rates are concerned, while the RBI may be instigated by positive factors such as robust GDP (8.9% in Q2 of FY 2010-11) and IIP (10.8% in October 2010); the tight liquidity situation at present may preclude the RBI from raising policy rates in the mid-policy review meeting scheduled on December 16, 2010. Moreover, as advance tax payments are scheduled for this month, liquidity is further expected to tighten during this month, which may also take yields of short-term debt instruments on a northward journey for some time. So, it is a “catch-22” situation for RBI.