Costly onion pushes inflation to 6-mth high

Written by fe Bureau | New Delhi | Updated: Sep 18 2013, 02:54am hrs
Wholesale inflation scaled a six-month peak of 6.1% in August as food prices hit a three-year high, complicating RBI governor Raghuram Rajan's math when he comes out with the policy review later this week.

Onion ensured further tears as a 244.62% surge in prices drove food inflation to 18.18% in August, compared to 11.91% in the previous month, aided by high vegetable and rice prices.

Surprisingly, consumer price index (CPI) in which food items have a higher weightage than the wholesale price index (WPI) showed that retail food inflation hit 11.06% in August, much lower than the WPI for the month.

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Retail vegetable prices rose 26.48% last month, compared to the whopping 77.81% surge in wholesale prices, according to the data. While consumer inflation fell to 9.52% in August from 9.64% in the previous month, wholesale inflation actually rose from 5.79% in July. Core inflation--a key input for monetary policy making--dropped further to 1.9% last month from 2.4% in the previous month.

"The fall in core inflation is the impact of weak demand, despite some pass-through of the sharp increases in input costs into final products to cushion margins. The month of August witnessed massive volatility and a sharp depreciation of the rupee. Rupee dropped by nearly 11.5% during August against the dollar. This kept the inflation in the globally linked fuel category (petrol, naptha, aviation turbine fuel, bitumen) high in August," said a Crisil Research note.

"Double whammy from the weak rupee and rise in the global crude prices due to escalation of Syrian conflict is largely behind this. Despite some strengthening, the rupee will remain significantly depreciated with regard keeping upward pressure on import component of inflation," the note said.

Crisil on Monday revised upward its average WPI inflation forecast for this fiscal to 6.2% from 5.3%. The rating agencies expect the RBI to keep interest rates unchanged on September 20 and also for the rest of the year.

"Food inflation continues to be a problem while increasing prices of fuel products also has an upward effect on inflation. While the US Federal Reserve action on Wednesday will hold a clue to monetary policy action, we believe that rates will remain unchanged though some of the earlier liquidity curtailment measures could be partly reversed," according to a research note by CARE Ratings.

Industry bodies said high inflation shouldn't discourage the RBI from trimming policy rates. "The revival of inflation, especially that of food prices, calls for urgent steps to address supply side bottlenecks. The rise in inflation should not come in the way of the forthcoming monetary policy on September 20 as it is of utmost importance to revive investor sentiments...inflation related to food prices is supply-driven and not due to excess demand. The good monsoon experienced during the year should ease price pressure on food items, going forward," said CII director-general Chandrajit Banerjee.

While keeping inflation under check has to be a priority, it is imperative that we continue efforts to rekindle investor sentiment and push for higher growth, said Ficci secretary-general A Didar Singh.