Inflation inches up to 9.73% in Oct

Finance Minister Pranab Mukherjee,however,expressed the hope that prices will calm down as a result of good monsoon. “I do hope the full impact of the good monsoon will be felt. And steps we have taken to improve the supply side will yield results,” he said while attributing the high inflation to rising prices of certain food items.

As per the data released on Monday,food items became 11.06 per cent more expensive year-on-year during the month under review.

Food inflation was at 9.23 per cent in September.

Inflation in the fuel and power segment stood at 14.79 per cent on an annual basis in October,as against 14.09 per cent in the previous month.

The spill-over of the over Rs 3 per litre hike in petrol prices by oil marketing companies in mid-September seems to have been reflected in the numbers.

This is the 11th consecutive month when headline inflation has stood above the 9 per cent mark. “These trends partly reflect the impact of depreciation of the rupee on prices of imported inputs,” ICRA economist Aditi Nayar said.

The rupee has depreciated by over 10 per cent against the US dollar in the last four months. The exchange rate currently stands near Rs 50 per dollar,thus making imports more expansive,especially of crude oil.

Inflation in overall primary articles stood at 11.40 per cent in October,compared to 11.84 per cent in September.

Prices of manufactured products,which have a weight of around 65 per cent in the WPI basket,went up by 7.66 per cent year-on-year in October,as against 7.69 per cent in September.

Inflation in manufactured items has been high since February this year,when it crossed the 6 per cent-mark.

Meanwhile,the inflation numbers for August has been maintained at the original estimate of 9.78 per cent. This is after a long time that final estimates of inflation for any month has not been revised.

Experts said that the Reserve Bank is unlikely to go for another hike in interest rates at its next mid-quarterly review in early December. “Inflation is expected to ease over the course of the third quarter … Accordingly,we expect the RBI to leave the repo rate unchanged in the December policy review,in line with the guidance provided in the second quarter review of monetary policy,” Nayar said.

In the last review,the apex bank has already said that another rate hike in December is unlikely. The apex bank has already hiked key policy rates 13 times since March,2010,to tame inflation.

India Inc has said the string of rate hikes,which have raised the cost of borrowing,have acted as a dampener to fresh investment and hindered growth.

Growth in industrial production fell to a two-year low of 1.9 per cent in September. The economic growth in the April-June period stood at 7.7 per cent,the slowest expansion rate in the past six quarters.

At its second quarterly review last month,RBI said it expects inflation to start moderating by December and fall to 7 per cent by March,2012.

Global financial services major Barclays termed the October inflation as “in line with expectations”. “The November inflation is also likely to hover around a similar level before softening from December onwards. Our expectation in this regard is broadly in line with the central bank’s projections,” Barclays Capital economist Siddhartha Sanyal said.

Inflation surges above forecast in Oct

India’s headline inflation was unchanged in October,worse than forecast and above the 9 percent mark for the eleventh straight month,complicating monetary policy for the Indian central bank.

India’s central bank,the D Subbarao-led RBI (Reserve Bank of India) has raised interest rates 13 times since early 2010 but has failed to contain price pressures which are threatening to hit double-digit levels due to supply and transport bottlenecks and high global commodity prices.

The RBI acknowledged in its October review that growth risks were being reflected in slowing economic indicators for Asia’s third-largest economy,but still raised its policy lending rate,the repo rate,by 25 basis points.

It also said that if inflationary pressures started to abate by December,more rate hikes may not be needed.

Annual wholesale price index in October stood at 9.73 percent versus 9.72 percent in September,as local prices for energy and food continued to rise despite a sharp pullback in global commodity prices in recent months.

Fuel price inflation in October stood at 14.79 percent while food inflation was 11.06 percent.

The RBI,which has been the world’s most aggressive central bank in fighting inflation,has now become an outlier as global economic risks grow.

Elsewhere in Asia and in parts of Latin America,some central banks are moving to a more accommodative stance or preparing to do so in the face of mounting global risks,with central banks in Indonesia and Australia cutting interest rates in recent weeks and others such as the Bank of Korea toning down its rhetoric on inflation.

RBI statements have puzzled economists. It has left its forecast for WPI inflation by March 2012 unchanged at 7 percent while downgrading growth forecasts,acknowledging it expects high inflation levels to persist for a further two months and warning of the risks of a premature end to policy tightening.

To some economists,it suggests unwillingness on the part of the bank to recognise rate rises have had little impact on inflationary pressures but inflicted heavy damage on investment.

Indian federal bond yields and swap rates inched higher,while the rupee trimmed gains after slightly higher-than-expected October inflation data.

Data is in line with expectations. I don’t think the RBI will lower its vigil yet on inflation concerns,said Kumar Rachapudi,fixed income strategist at Barclays Capital in Singapore.

At 11:35 a.m.,the most-traded new 10-year bond yield was up 1 basis point at 8.97 percent from before the data.

The benchmark five-year swap and the one-year rate both inched up 1 basis point each to 7.38 percent and 8.13 percent,respectively,traders said.

The main share index extended gains marginally to be up 0.85 percent.

Data on Friday showed India’s factory output grew at its slowest pace in two years in September,suggesting high domestic interest rates,worries about Europe’s debt crisis and fragile global demand were dampening industrial activity in India.

UNDERLYING INFLATIONARY PRESSURES STRONG

Local food prices,which are largely outside the domain of monetary policy,have risen sharply in October and with little help from the government to ease supply-side pressures,it is a key contributing factor to high inflation.

Food price inflation slowed slightly to an annual 11.81 percent in the week to October 29,government data showed on Friday.

Last week state run refiners raised gasoline prices by 2.7 percent,the fourth increase in a year and a move which will further stoke inflationary pressures in the economy.

The economy has also been hit by a depreciating rupee which fell to its lowest level in two and a half years on Friday thus making oil imports more expensive. India imports 75 percent of its oil consumption.

Core inflation,which excludes food and fuel prices,is still high,indicating persistent price pressures in the economy.

However,Subir Gokarn,a deputy governor of the Reserve Bank of India said on Friday that interest rates may have peaked and he sees inflation moderating,reinforcing expectations it will pause its policy tightening at its next policy review in December policy.

INSTANT VIEW/COMMENTARY:

RADHIKA RAO,ECONOMIST,FORECAST PTE,SINAGPORE:

October WPI surprised to the upside holding up above 9.0 percent mark for 11th successive month and reinforces worries that the anticipated moderation in price pressures might not materialise into end-year.

Food and fuel prices posted double-digit growth while manufacturing WPI steadied above 7.5 percent y/y. This data print alongside weak September industrial production highlights RBI’s policy conundrum and the likely course of action ahead.

We do not expect the firmer inflation print alone to revive odds for another hike in December. This reading,however,does lower scope of any imminent rates cuts and we expect benchmark rates to remain on hold until end-FY12,with trajectory thereafter hinging upon evolving growth risks.

DARIUSZ KOWALCZYK,SENIOR ECONOMIST AND STRATEGIST,CREDIT AGRICOLE CIB,HONG KONG:

The data shows that the RBI has not yet achieved a breakthrough in its fight against price pressures. This will reduce upside for the Indian rupee today and is likely to push the short end of the INR OIS curve up.

We expect inflation to start falling in December. The RBI is likely to stay put,waiting for a decline,and may well cut the cash reserve ratio in early 2012.

KUMAR RACHAPUDI,FIXED INCOME STRATEGIST,BARCLAYS CAPITAL,SINAGPORE:

Data is in line with expectations. I don’t think the RBI will lower its vigil yet on inflation concerns. The RBI will make sure that call rate will be close to the repo rate in line with its anti-inflationary stance.

ARUN SINGH,SENIOR ECONOMIST,DUN & BRADSTREET,MUMBAI:

It is clear that despite the many months of interest rate increases,inflation is not moderating as expected and remains well above 9 percent. This is a big worry.

We know inflation in India is being worsened by supply-side bottlenecks about which RBI can’t do much,so it will stay focused on managing inflation expectations.

Hence,another 25 basis point hike in repo rate is most likely before the RBI looks to pause.

SHAKTI SATAPATHY,FIXED INCOME STRATEGIST,AK CAPITAL,MUMBAI:

The headline number is steady on month-on-month basis and a reflection of persistent rise in protein-rich food items through out the previous months.

However,the manufacturing number indicates moderation. The prime challenge to face ahead is centred on the fuel price index. With oil marketing companies running short of cash,either a price deregulation or subsidy outflows or both could take place,thereby worsening the near-term inflationary outlook.

With growth trending down and the RBI rate hikes in peak zone,reciprocate action should come from the government end to curb the overall demand for the subsidized oil.

SUJAN HAJRA,CHIEF ECONOMIST,ANAND RATHI SECURITIES,MUMBAI

There is no major change as far as manufacturing is concerned,and it is the food prices that are on the upside. The bad thing is that we are not seeing month-over-month softening in inflation.

But now base effect will start playing out,and even if the prices don’t fall,because of the base effect,inflation will start easing by December. Inflation will come off by 200-250 basis points by March.

MARKET REACTION:

The main stock index rose slightly to 0.84 percent after the data from 0.75 percent beforehand.

The new 10-year 8.79 percent,2021 bond inched a basis point higher to 8.97 percent after the data.

The benchmark five-year swap rate and the one year swap rates each moved up 1 bp to 7.38 percent and 8.13 percent respectively,traders said.

The partially convertible rupee trimmed early gains after inflation data and was at 50.08/09 per dollar.

BACKGROUND:

– Rising borrowing costs and a weak global economic environment have hurt growth. India’s industrial output expanded 1.9 percent in September,the weakest pace in 2 years,in further evidence of a slowdown in Asia’s third-largest economy.

– Food inflation eased slightly to an annual 11.81 percent in late October,as monetary policy which is largely ineffective in reining in food prices was not backed up by measures to ease supply side bottlenecks.

– In early November,state-run refiners raised gasoline prices by 2.7 percent,a move which will stoke inflationary fires in the economy.

– The rupee has shed about 12.5 percent from its 2011 peak reached in late July,adding to the pressure on imported inflation.

– A deputy governor of the Reserve Bank of India said on Friday that interest rates may have peaked and inflation is seen moderating going forward.

– The economy expanded 7.7 percent in the April-June period,its weakest pace in six quarters.