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Inflation Seen Remaining Elevated In September

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India likely saw little respite from high inflation levels in September as prices of food and imports continued to climb despite a relief rally in the battered rupee, a Reuters poll found.

The poll of 24 analysts showed wholesale prices likely rose 6 per cent last month, slightly below a six-month high of 6.1 per cent in August. Consumer prices likely rose 9.60 per cent from August's 9.52 per cent. Both sets of figures will be released late on Monday, 14 October.

If realised, the elevated price levels will add more pressure on the Reserve Bank of India - which has clearly signalled that it will target inflation - to raise interest rates even as the economy is growing at its weakest pace in a decade.

Indeed, the consensus would make it the fourth consecutive month of wholesale prices above the RBI's perceived comfort level of 5 per cent.

The biggest driver of inflation is still expected to be food inflation, which accelerated to a three-year high of 18.18 per cent in August because of supply disruptions due to heavy monsoon and poor storage facilities.

"We have seen food contribute significantly to inflation in the past couple of months...and it looks like prices are still at elevated levels for perishables, mostly vegetables," said Radhika Rao, an economist at DBS in Singapore.

The cost of onions shot up by 245 per cent in the year to August, other vegetable prices have risen 77 per cent, while eggs, meat and fish were up nearly 19 per cent.

Last month, RBI governor Raghuram Rajan surprised markets with a 25 basis points hike and clearly signalled that the central bank's focus would be bringing down inflation.

As a result, economists polled by Reuters after that RBI meeting forecast a further 50 basis points of increases in the repo rate in six months, a u-turn from their earlier view of 50 bps of cuts.

"The new governor has clearly mentioned that he is focussing a lot on how inflation is panning out and this number will only affirm his belief that inflation is still a story to be addressed," Rao added.

A weak rupee is another reason why analysts forecast inflation would remain stubbornly high, adding to the central bank's woes.

Although the rupee gained 5 per cent last month, it is not expected to recover much more ground in the near term and remain weak, according to a separate Reuters poll, making the cost of crude oil imports more expensive.

The rupee's recent gain came after a more than four months of decline, with the currency losing as much as 20 per cent at one stage and hitting a series of record lows.

That depreciation sent fuel inflation to a 10-month high in August, as India is one of the largest importers of crude oil.

Industrial output data on Friday, 11 October, is expected to give market watchers more clues on the health of Asia's third-largest economy.

Indian manufacturers likely increased production in August, although at a slower pace than in July, as infrastructure output rose, but access to cash was tougher, a Reuters poll found.

However, recent manufacturing purchasing managers' index (PMI) surveys have shown activity shrank in August and September.