(Source: Reuters website, PersonalFN Research )

 

India’s Wholesale Price Index (WPI) eased this month (October 2010) by 0.04%, thus now positioning at 8.58%. When analysed with the data available last year during the same period i.e. October 2009, the headline inflation still appears elevated due to low base effect (last year in October 2009 WPI inflation was 1.34%).

 

Food inflation meanwhile for the month of October 2010 marginally dropped to 14.31% from 15.71% in September 2010, as supply pressures eased due to a good monsoon. Also manufacturing inflation too stood at comfortable levels of 4.75%, but was slightly higher than 4.59% witnessed in the month of September 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 October 2010, petrol prices rose by 1.07% while other fuel prices remained intact.

 

As a reaction to the WPI data the Planning Commission Deputy Chairman – Mr. Montek Singh Ahluwalia said, “Inflation has declined, but food inflation is high. Further decline is necessary. Inflation is coming down slowly.”

 

Our view on inflation and interest rates

 

In our opinion WPI inflation above the 8% mark, will keep the Reserve Bank of India (RBI) under an uncomfortable zone. But, since IIP numbers for the two consecutive months have shown a nose dive from 15.0% (in July) to 4.4% in September; the RBI may preclude from adopting its calibrated exit path in increasing policy rates at least in the second quarter mid-policy review meeting (scheduled on December 16, 2010), as an increase in policy rates might hurt economic growth.

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