(Source: Office of Economic Advisor, PersonalFN Research)

 

It appears that the Reserve Bank of India’s (RBI’s) stance of increasing policy rate (seven times since March 2010) has finally showing some results. India’s Wholesale Price Index (WPI) inflation for January 2011 has eased marginally to 8.23% (from 8.43% in December 2010), as the prices of wheat, sugar, pulses and potato corrected. Hence now, the WPI inflation is almost as the same level as was in January 2010 (8.53%), from where it began its northbound journey. However, a point to note is that the WPI inflation is still above the 8% mark since last 12 consecutive months.

 

Moreover, food inflation is still sailing in the double-digit terrain (13.07% for the week ended February 11, 2011). Also, prices of fuel and power too, have shot up by 11.41%, with petrol rising 27.37% on a year-on-year basis.

 

Commenting on the WPI inflation for January 2011 the Finance Minister – Mr. Pranab Mukherjee said, “I am hoping that it (inflation) would be roughly around 7% (by March end). I hope so. But I cannot firmly commit it. Don't go by the weekly fluctuation or monthly fluctuations. This was expected. It is nothing unusual.”

 

We believe that the headline inflation still being above the 8% mark (which is the uncomfortable zone of the RBI) may put pressure on the RBI to adopt a calibrated exit path to tame the spiraling inflation. As an effect we may witness another rate hike of 25 – 50 basis points in the fourth quarter mid-review of monetary policy 2010-11 (scheduled for March 17, 2011).

 

However, since the base effect is fading away the inflation numbers are likely to come down in the following months. 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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