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Inflation Seen Falling To 7.5 Pct In Dec

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India's headline inflation probably fell sharply to 7.50 per cent year-on-year in December from 9.11 per cent in the previous month, helped by easing food prices, a Reuters poll showed.

Forecasts from a poll of 27 economists ranged from 7.00 per cent to 8.60 per cent. Only three of the 27 economists polled expect inflation to stay at or above 8 per cent.

The wholesale price index has been stuck above 9 per cent for a year and 13 interest rate increases by the Reserve Bank of India since March 2010 had failed until recently to arrest its rise.

However, annual food prices fell 3.36 per cent in the week to December 24, the first decline in nearly six years, on improved supply of pulses and vegetables.

"We expect a moderation in inflation on account of substantial easing of food prices and high statistical base," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

"However, we perceive manufactured product price inflation to have remained firm in December on account of costlier imports and inelastic demand," she said.

The Indian rupee fell 16 per cent in 2011, increasing the cost of imported goods, which puts upward pressure on inflation.

The RBI is expected to cut interest rates this year, according to the latest Reuters poll taken before the December policy review, bringing the repo rate down to 8 per cent by the end of the year from 8.50 per cent now.

Factors To Watch

  • Annual fuel price index eased to 14.60 per cent in December 24 week from a rise of 15.24 per cent in December 3 week.

  • Primary articles price index was up 0.10 per cent in the year to December 24 as compared to 2.70 per cent a week before.

  • India's industrial production is expected to rise 2.2 per cent in November, according to a Reuters poll.

Market Impact

  • Bond and overnight indexed swaps markets are factoring in a 7.40 per cent to 7.50 per cent inflation number for December.

  • If the inflation figure is around 7.30 per cent, the 10-year benchmark government bond yield could fall to 8.10 per cent, while the 1-year swap rate could soften by 20 basis points and the 5-year swap rate could decline by 10 basis points.

  • Dealers said if the inflation number is above 7.60 per cent, the 10-year bond yield is likely to rise to 8.35-8.40 per cent, while the 1-year swap rate could climb 10 basis points.