Spike in inflation fans rate fears
The Financial Express, January 15, 2010, Page 1
fe Bureaus, New Delhi
Inflation rose to a year’s high of 7.3% in December, driven by a 20% jump in food prices, amid indications that generalised inflationary pressures are looming large. With the December wholesale price index rising to its highest after November 2008, and going way above 4.8% reported in the previous month, it looked certain that RBI would attempt to contain liquidity in the upcoming policy review, analysts said.
The annual inflation rate was 6.15% in December 2008.
Prime minister’s Economic Advisory Council chairman C Rangarajan told FE that even though supply-side management is key to controlling inflation, some containment of liquidity seemed necessary. “Some monetary action to contain liquidity can be tho-ught of,” he said, adding that the food prices were still “very high” although, lately, there has been “some tendency” for the prices to moderate.
Weekly whole sale price data for food items released on Thursday came as a respite—food inflation for the week ended January 2 stood at 17.28% from a year earlier as against 18.22% in the previous week.
However, that could hardly dissuade the central bank from using its monetary tools, especially since latest data showed that industrial production rose at faster-than-expected 11.7% in November, signalling robust economic recovery.
Further, Thursday’s data also raised concerns that inflation could continue to rise and peak at 10% in March 2009, as against the RBI forecast of 6.5%.
When the central bank reviews the monetary policy on January 29, it could raise cash reserve ratio (CRR) by half a percentage point or so, if it did not also go for a very moderate hike in policy rates as well, analysts that FE spoke with, said.
“We believe that a gradual policy normalisation through liquidity withdrawal and a higher policy rate are preferable to steeper rate hikes later on. We expect the rate hiking cycle to begin later this month,” said Sonal Varma, vice-president, Nomura Financial Advisory & Securities (India) Ltd.
In December, there was steep increase in prices of food items and manufactured edible items like sugar. While prices of potatoes were up 123.85%, pulses were dearer by 41.58%. As a result, non-processed food articles component of the WPI was up 19.17% against 10% in the same month of 2008. This pushed up the primary articles group index by 14.88%, against 11.15% seen in December, 2008.
Processed food articles in December were costly by 26.4% compared with 4.21% a year ago. This was because sugar prices have shot up by 54% in December, against 14.51% seen in the same month of 2008. Rising food prices has the government worried and was a hot topic of discussion in a pre-Budget meeting between finance minister Pranab Mukherjee and his colleagues from the states. In an attempt to cool down prices, the government on Wednesday announced an extension of validity of duty free sugar imports, eased sugar processing norms and committed to release 2-3 million tonne of food grain in the open market.
The bond market yields eased as the inflation data was seen in line with expectations. While the 30-share Sensex gained 0.4% to end at 17584.87, the 50-stock Nifty increased 0.5% to close at 5,259.90.
The Financial Express, January 15, 2010, Page 1
fe Bureaus, New Delhi
Inflation rose to a year’s high of 7.3% in December, driven by a 20% jump in food prices, amid indications that generalised inflationary pressures are looming large. With the December wholesale price index rising to its highest after November 2008, and going way above 4.8% reported in the previous month, it looked certain that RBI would attempt to contain liquidity in the upcoming policy review, analysts said.
The annual inflation rate was 6.15% in December 2008.
Prime minister’s Economic Advisory Council chairman C Rangarajan told FE that even though supply-side management is key to controlling inflation, some containment of liquidity seemed necessary. “Some monetary action to contain liquidity can be tho-ught of,” he said, adding that the food prices were still “very high” although, lately, there has been “some tendency” for the prices to moderate.
Weekly whole sale price data for food items released on Thursday came as a respite—food inflation for the week ended January 2 stood at 17.28% from a year earlier as against 18.22% in the previous week.
However, that could hardly dissuade the central bank from using its monetary tools, especially since latest data showed that industrial production rose at faster-than-expected 11.7% in November, signalling robust economic recovery.
Further, Thursday’s data also raised concerns that inflation could continue to rise and peak at 10% in March 2009, as against the RBI forecast of 6.5%.
When the central bank reviews the monetary policy on January 29, it could raise cash reserve ratio (CRR) by half a percentage point or so, if it did not also go for a very moderate hike in policy rates as well, analysts that FE spoke with, said.
“We believe that a gradual policy normalisation through liquidity withdrawal and a higher policy rate are preferable to steeper rate hikes later on. We expect the rate hiking cycle to begin later this month,” said Sonal Varma, vice-president, Nomura Financial Advisory & Securities (India) Ltd.
In December, there was steep increase in prices of food items and manufactured edible items like sugar. While prices of potatoes were up 123.85%, pulses were dearer by 41.58%. As a result, non-processed food articles component of the WPI was up 19.17% against 10% in the same month of 2008. This pushed up the primary articles group index by 14.88%, against 11.15% seen in December, 2008.
Processed food articles in December were costly by 26.4% compared with 4.21% a year ago. This was because sugar prices have shot up by 54% in December, against 14.51% seen in the same month of 2008. Rising food prices has the government worried and was a hot topic of discussion in a pre-Budget meeting between finance minister Pranab Mukherjee and his colleagues from the states. In an attempt to cool down prices, the government on Wednesday announced an extension of validity of duty free sugar imports, eased sugar processing norms and committed to release 2-3 million tonne of food grain in the open market.
The bond market yields eased as the inflation data was seen in line with expectations. While the 30-share Sensex gained 0.4% to end at 17584.87, the 50-stock Nifty increased 0.5% to close at 5,259.90.
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