Wholesale inflation up in Feb on higher fuel cost

Economists still expect 25-bp repo rate cut, as core inflation eases to below 4%

After three months of decline, the Wholesale Price Index (WPI)-based inflation rose to 6.84 per cent in February, from 6.62 per cent the previous month, reflecting the impact of fuel price corrections made by the government.

Even then, economists expect the Reserve Bank of India (RBI) to cut the repo rate by 25 basis points (bps) in its monetary policy review on March 19. Core inflation (that in manufactured products without the food part) fell below four per cent for the first time in 35 months, to 3.76 per cent in February. Food inflation eased to 11.38 per cent in February from 11.88 per cent in January. This is at variance with the trend of its Consumer Price Index (CPI) counterpart. CPI-based food inflation had risen to 13.73 per cent in February, from 13.36 per cent the previous month.

The fuel and power part of inflation, having a weight of 14.91 per cent in WPI, moved up to 10.47 per cent from 7.06 per cent. All the three components — liquefied petroleum gas (LPG), diesel and petrol —whose prices were raised by the government showed a jump. Inflation in LPG was up 26.21 per cent in February from 7.28 per cent in January. The rate of price rise in diesel moved up to 19.19 per cent from 7.06 per cent. Petrol inflation rose to 6.25 per cent from 3.77 per cent. (SOFTER INFLATION: CASE FOR A RATE CUT?)

The decision to partially decontrol diesel prices, petrol price increase and the cap on subsidised LPG cylinders was termed one of the important factors that pushed up inflation. The government had made these decisions on January 17 to gradually eliminate under-recovery on the products by oil marketing companies.

Petrol prices were also increased by Rs 1.50 a litre on February 16.

Even as WPI food inflation came down in February, onions continued to be a hot commodity. Inflation in this sensitive item rose to 154.53 per cent in February from 111.52 per cent in January. Vegetables as an overall category saw easing of inflation from 28.45 per cent in January to 12.11 per cent in February.

Inflation in manufactured products eased to a 38-month low of 4.51 per cent in February from 4.81 per cent in January.

Since RBI saw the movement in core inflation as a key determinant of its monetary stance, economists said the central bank might go for  a 25-bp cut in the policy rate.

In fact, sequential momentum in core inflation turned negative in February for the first time in 45 months, reflecting the slackening growth momentum and diminished purchasing power at the hands of the manufacturers.

“These factors, amid downside risks to growth, reinforce our call of a 25-bp cut in the repo rate by RBI,” said YES Bank Chief Economist Shubhada Rao.

Icra senior economist Aditi Nayar said the pick-up in WPI inflation was largely on account of suppressed inflation being recognised. The considerable moderation in core inflation and fiscal compression being attempted by the Union Budget through a reduction in subsidies would dampen inflationary pressure.

Moody’s Analytics’s senior economist Glenn Levine said: “This WPI release will figure in next week’s RBI interest rate deliberations but probably won’t be enough to sway the decision. The recent rumblings from RBI, including praise for the government’s reforms and recent budget, suggest a small March rate cut is likely. We expect a 25-bps cut in the repo rate.”

However, February’s figures are provisional and the government has been revising upwards the final figures for the rate of price rise. For example, in a statement released on Thursday, inflation for December was revised to 7.31 per cent from the 7.18 per cent estimated provisionally earlier.

Inflation has risen to 5.71 per cent since March 2012, against 6.56 per cent in the corresponding period of 2011-12.