High food prices, especially of onion and other vegetables, pushed up September inflation to 7-month high of 6.46 per cent that may make it difficult for the Reserve Bank of India (RBI) to cut key interest rate on October 29 to spur industrial growth.
The Wholesale Price Index (WPI) based inflation rose for the fourth month in a row, government data revealed today.
Inflation was 6.1 per cent in August and 5.85 per cent (revised upward from 5.79 per cent) in July. In September last year, it was 8.07 per cent.
The sharpest increase was in onion prices which jumped by 322.94 per cent in September, over the same month last year.
Vegetables in general were costlier by 89.37 per cent year-on-year making life difficult for the common man.
Fruits too were costlier by 13.54 per cent year-on-year during September.
Overall, the food inflation increased at higher rate in September at 18.40 per cent as compared to the previous month. Inflation in this segment was 18.18 per cent in August.
Planning Commission Deputy Chairman Montek Singh Ahluwalia said that if inflation is higher than 6 per cent it is high and at an "uncomfortable" level. However, he expressed confidence that it would ease in the coming months.
Food Minister K V Thomas said cost of production has increased due to NREGA wages, besides higher MSP.
The Reserve Bank of India, which is scheduled to unveil the second quarter review of monetary policy on October 29, will factor in the rising inflation while deciding on the policy rates amid rate cut demand by industry to boost economic activities.
The August IIP data, a key economic indicator, showed that industrial output expanded by meagre 0.6 per cent.
The data further revealed that there was decline in prices of egg, meat, fish, beverages, tobacco, cereals, rice and wheat in the month under review over August.
The inflation in the manufactured items segment was 2.03 in September year-on-year.
Inflation for LPG (liquefied petroleum gas) and petrol was at 9 per cent and 9.64 per cent, respectively, on annual basis.
"I agree that inflation rate is still on the high side but it will soften in a month or so... The comfort level of inflation is 5-6 per cent and if it is higher than 6 per cent, it is uncomfortable," Ahluwalia told reporters.
He said the steps taken by government to de-stock the excess food stocks would result in cooling off of prices in few weeks ahead.
A Barclays report said onion prices are reported to be softer in October, and "we continue to expect food prices to normalise somewhat in the coming months on the good monsoon and a large increase in sowing".
Commenting on the data, Ficci Secretary General A Didar Singh the food inflation has remained at high levels for an extended period and needs to be tackled by taking adequate measures from the supply and distribution side.
"Unless we do this, we face the risk of food inflation becoming a systemic problem," he said.
Assocham Secretary General D S Rawat said the skewed inflation structure would further affect the prospects of economic growth revival. He said both government and the monetary authority need to focus on boosting the growth.
"The upcoming quarterly monetary policy review must not resort to interest rate tightening, as it would further push the prices up," he added.
SURESH KUMAR RAMANATHAN, REGIONAL HEAD OF FX AND RATES STRATEGY, CIMB, KUALA LUMPUR:
"Much of the inflation that rose in September is due to squeeze in liquidity and the fact rates were raised sharply higher. It's not surprising that the first impact was seen in food prices. The rise should taper off in coming months as liquidity improves in money markets."
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI
"The data is almost in line with the upward inflationary expectation owing to higher food prices in general and onion prices in particular.
"Further marginal rebound in the manufacturing inflation and core indicates some inflationary pressure in coming months. Having said that, the sub factors within the manufacturing space are well within the comfort zone.
"Though a good monsoon is expected to improve the food prices in the coming quarters, the central bank would stick to its anti-inflationary stance on October policy meeting and might observe a trending down in the inflationary forces before offering any rate-supportive growth triggers."
ARVIND CHARI, FIXED INCOME FUND MANAGER, QUANTUM ASSET MANAGEMENT, MUMBAI"
"WPI print much higher than market expectation. Manufactured products and non-food primary has also shown increase, which could be the result of the large INR depreciation between May and August finally catching through in the numbers."
"But given the rebound in INR in September, we should see some cool off in the INR-linked commodities ahead."
"Food prices still remain high, especially the volatile prices of onions which are keeping the index elevated. The impact of the good monsoons is still yet to be felt as rice and wheat prices are still increasing month-on-month."
BADRISH KULHALLI, FIXED INCOME FUND MANAGER, HDFC STANDARD LIFE INSURANCE CO
"There seems to be some amount of the currency weakness being passed on to prices, especially primary article prices. We haven't seen any improvements in prices because of the good monsoon. probably we'll have to wait until November and December in time for the harvest season to see any impact on food prices.
"This will not give much comfort for RBI to hold rates and sets up for a rate hike in the upcoming policy review at the end of the month."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:
"Headline inflation has risen to 6.46 percent in September on account of joint impact of food inflation and rupee depreciation.
"Rising input costs have again pushed up core inflation on a month-on-month basis. We have to wait and see how better harvest this year pushes down the food inflation despite pressures from the political economy. While CAD worries have faded, inflation continues to remain the major macro risk".
DHARMAKIRTI JOSHI, CHIEF ECONOMIST, CRISIL LTD, MUMBAI:
"The non-core inflation is pressurising and it cannot be ignored by the central bank. And we believe another 25 basis points rate hike is coming because expectation on inflation still continue to remain high.
"Monsoon impact is yet to play out, and if the monsoon rains put some downward pressure on food, but food will not be completely tamed though. Looks like at least one more rate hike after October is likely.
R K GUPTA, MANAGING DIRECTOR, TAURUS MUTUAL FUND, DELHI
"Inflation is not materially high as government had increased gas, petrol and diesel prices last month. Even vegetable prices are high especially in North India because of heavy rains.
"It is on expected terms. Only fear is with higher WPI rate, the Reserve Bank of India may consider raising rates further.
"I don't think inflation will come down because every month government is raising prices of one product or the other."
ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI:
"The bottom line is that with the new governor it's very clear he will not unnecessarily over-react to just one month's print.
"I think the RBI is forward looking and they are looking at the medium-term inflation trajectory as it's likely to pan out instead of getting excessively influenced by this one print.
"Having said that, there was a case for a repo rate hike, which the governor had sort of pointed to, in the next policy. And, I think this data sort of strengthens the case for keeping things a little tight as far as monetary policy is concerned.
"We will see a substantial pick up from December because of the base effect. So the numbers are not going to look any better going forward.
"I think what we are trying to arrive at, is a situation where the rate level is compatible with both the inflation situation and the growth situation on the ground. I think 7.75-8.00 percent repo rate, that should be consistent with both the growth situation and the inflation pressures."
A. PRASANNA, ECONOMIST, ICICI SECURITIES, PRIMARY DEALERSHIP LTD, MUMBAI:
"Ideally, one number should not change expectation. There was anyway a case for a rate hike based on the previous inflation prints, including the CPI. This number has reinforced the case for a 25 basis points repo rate hike by the RBI."
RADHIKA RAO, ECONOMIST, DBS, SINGAPORE:
"WPI inflation continues to accelerate on higher primary index and release of suppressed prices - especially as certain product categories punch above their weight.
"Looking ahead, as base effects wear-off, headline prints could move another leg higher October onwards. Focus shifts to the CPI next, amidst increasing indications that the RBI might align the benchmark policy decisions to the retail gauge.
"This being the case, there is headroom for the repo rate to be adjusted higher in the coming months. These concerns are reflected in the knee jerk negativity in the market."
DEVEN CHOKSEY, MANAGING DIRECTOR, K R CHOKSEY SECURITIES LTD, MUMBAI
"Inflation numbers are a complete letdown. I think food and fuel have killed the numbers. Markets are disappointed as traders have been expecting the Reserve Bank of India to go on a rate reduction program, and that is where a low inflation would have helped."