(Source: Office of Economic Advisor, PersonalFN Research)

 

India’s Wholesale Price Index (WPI) jumped to 8.43% in the month of December 2010 as compared to 7.48% in November 2010. When assessed with the data available last year during the same period i.e. December 2009, the headline inflation still appears elevated due to low base effect (last year in December 2009 WPI inflation was 6.92%).

 

Food inflation too jumped to 13.55% in December 2010 from 9.41% in November 2010. However, the annual inflation for manufactured products mellowed down marginally to 4.46% in December 2010 from 4.56% in November 2010. But nonetheless inflation for non-food manufactured products rose to 5.4% from 5.3% for the same period. This resulted in the overall index for manufactured products to rise by 0.4% during December 2010 indicating a demand side pressure.

 

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

 

In the month of December 2010, fuel inflation too was up at 11.19% from 10.32% in November 2010.

 

But this time the Finance Minster – Mr. Pranab Mukherjee expressed more concern on the food inflation, as it remained at elevated levels (16.91% for the week ended January 1, 2010). He said, “Food inflation at this level is not acceptable and we are trying our best to control it along with the cooperation of state governments.”

 

Our view on inflation and interest rates

 

We believe that the headline inflation would still remain above the comfort levels of the RBI, and is expected to remain stiff as the impact of spiralling food and crude oil prices would start creeping in the headline WPI inflation.. As an effect of this we may see RBI increasing policy rates by 25 basis points in third quarter review of monetary policy 2010-11 (scheduled on January 25, 2011).

 

For the fiscal year 2010-11 (ending in March 2011), we expect WPI inflation to be around 6.5% - 7.00% levels.

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