Hopes of a status quo from RBI in the upcoming monetary policy dashed as the Government data reported the whole sale price index (WPI) inflation at a 14 month high of 7.52 per cent in November.
With all eyes now fixed on the December 18 monetary policy, analysts are now sure that due to a steep rise in inflation, RBI would be forced to raise short term lending rates at least by 25 basis points (bps) or 0.25 per cent.
Inflation rose to a 14-month high of 7.52 per cent in November as food items, especially potato and onion became costlier. Inflation is at the highest level since 8.1 per cent in September 2012 and compared with 7 per cent in October. Vegetable prices shot up 95.25 per cent in November compared with a 78.38 per cent increase in the previous month. As per the Government data, potato prices shot up by 26.71 per cent in November while onion inflation remained high at 190.34 per cent in November.
Inflation in the food segment comprising wheat, pulses, vegetables and milk, among others, was at an almost four-year high of 19.93 per cent as against 18.19 per cent in October. The data showed protein-rich items such as eggs, meat and fish were costlier by 15.19 per cent, while milk was dearer by 6.25 per cent.
Talking to The Pioneer, Gaurang Shah, Assistant Vice President of Geojit BNP Paribas expressed concerns on the sharp rise in inflation and said, “With WPI inflation so high, 25 bps hike in repo rates is certain. RBI has no room to keep the rates unchanged and hence would opt for increasing rates.”
Apart from the rate hike, Gaurang also feels that the inflation is expected to remain high in the coming months. “Inflation is high not due to issues in production but because problems in the supply cycle of the country. Unless those problems are not resolved, we do not expect inflation coming down in the near future.”
Global bank, HSBC in its note also asserted that after high WPI numbers, RBI would for sure hike rates. The note said, “WPI inflation rose more than expected. Firm underlying inflation pressures and sticky inflation expectations pose upside risks to inflation. Another rate hike from the RBI, therefore, seems to be in the cards.”
A few experts, who prior to the announcement of WPI numbers were hoping that RBI might not do any changes in the upcoming policy, are also saying that a rate hike is definite. But they also feel that going forward in the future, inflation would start showing signs of easing.
Krunal Dayma, Managing Director of First Step Capital expects inflation to ease in the coming months. He said, “We feel inflation easing down now as it already is at higher levels. We do not expect a sharp decline in inflation but do feel in the coming months we will see a breather as inflation might fall marginally.”
Earlier, the Government reported retail inflation, measured by the consumer price index (CPI), jumped to 11.24 per cent while the factory output contracted 1.8 per cent in October, as against growth of 8.4 per cent in the same month last year.
Inflation in the fuel and power segment was at 11.08 per cent, up from 10.33 per cent in October. Now in the present environment, all experts are prepared to see a hike of 0.25 per cent in short term lending rates. In the last two policy reviews, on September 20 and October 29, RBI had raised key lending rate each time by 0.25 per cent.