Inflation to turn positive soon

Inflation to turn positive soon
The Times of India, September 10, 2009, Page 21

Reserve Bank May Roll Back Easy Money Policy To Contain Price Rise

Prabhakar Sinha TNN

New Delhi: The annual inflation, based on whole sale price index (WPI) is likely to enter into the positive zone in the next couple of weeks after remaining in the negative territory for last three months. In the last couple of weeks, the whole sale price index has seen a sharp rise due to double digit increase in the prices of food articles.

Finance secretary Ashok Chawla said that the inflation may rise to around 6% by March 2010. A global securities research firm Barclay capital in a report said that the inflation may race up to 5.6% by December 2009 and to around 7% by March 2010. Similarly, Japanese research firm Nomura Financial Advisory and Securities (India) PTE Ltd said that inflation may touch 6.5% by March 2010.

However, the entry of WPI-based inflation into the positive territory is mainly due to the base effect. In fact, the inflation had turned negative mainly because of the rise in the commodity prices including petroleum products during May-September 2008. But as the global economy witnessed a recessionary trend since September 2008, the commodity prices fell sharply.

The fall was so sharp that the prices of the majority of commodities and industrial products remained at the lower level than what they were during May-September 2008. Therefore, despite the rise in food prices during last one year, the average weighted price of the items included in the basket to measure inflation remained in negative. The average weighted price of the items in the basket is known as WPI.

However, September onwards things are expected to change. In 2008, the prices crashed in the second half of September and early October. Therefore, the WPI fell sharply as shown in the chart last year. That means, the base, against which the prices are to be compared this year after mid September to calculate annual inflation is lower than what it was for the last three months.

At the same time, due to the rise in the prices of food products, the WPI this year has increased. Even if the prices do not go up from the present level, the inflation will become positive in the first week of October.

But as the prices are likely to go further up due to weak monsoon, the inflation may rise even sharply. A senior analyst said that it might enter into the positive territory in the next two weeks.

In fact, if the economic recovery starts, the rise in the inflation will be even sharper. Barclays capital said that the situation of the negative contribution to inflation by petroleum products since December 2008 will change soon. Similarly, the prices of other sources of energy like coking coal are also likely to go up.

This might put pressure on RBI to change its easy money policy. Higher food prices will result in an increase in manufactured items. Moreover, the Nomura report said, with input-cost pressure building, excess liquidity and an improving demand outlook can increase output prices with a lag.

In its latest annual report, the Reserve Bank of India noted that inflation expectations have not declined as much as the negative WPI reading suggests, and that the expansionary fiscal stance with accommodative monetary policy may not lead to a sobering of inflation expectation. Therefore, the report said, the RBI may start hiking its repo and reverse repo rates from January.