India's headline inflation is likely to remain high this year too, registering an average of 8.6% in 2011-12 as manufacturers are likely to pass on input costs to consumers, global banking giant Nomura said today.
In its 'Asia Economic Alert', the banking and asset management behemoth also said that the Reserve Bank is likely to hike the short-term lending (repo) rate by 100 basis points in 2011 with the purpose of curbing inflationary pressure.
"We expect Wholesale Price Index (WPI) inflation to average 8.6% year-on-year in FY12 from 9.4% in FY11," it said. The high projection is on account of the fact that costs have not yet been fully passed on to the consumers.
"Countering expectations of a moderation, inflation accelerated to (almost) 9% in March 2011...The negative surprise owed largely to manufacturers' passing on the higher input costs to consumers, amid strong demand.
"Our analysis suggests that the cost pass through is still incomplete and both headline and core WPI inflation will accelerate further in the first half of FY12 before retreating in the second half," it said.
The report also added that while output prices have risen sharply, margins continue to remain under pressure. This is specially so in case of tea and coffee, manmade fibres, wood products, machinery, transport equipments and fuel segments.
Headline inflation has been above the 8% mark since February 2010. The March numbers of 8.98% was much above the government and RBI's projection of 8%.
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"We are pencilling in 100 basis points of additional repo interest rate hikes in 2011, taking the terminal rate to 7.75%," Nomura said, without, however, making any projections about the RBI's short-term borrowing (reverse repo) rates.
RBI has already hiked the key-policy rates eight times since March 2010. Experts have said the central bank is likely to go for another mild hike at its next quarterly review on May 3 as inflationary pressure still persists.
The rate hikes are intended to suck out excess liquidity from the system and tame demand. The repo and reverse repo rates currently stand at 6.75% and 6.25%, respectively. Regarding fuel prices, it said the biggest disconnect between input cost and output price exists in that segment.
"The local price of LPG cylinder, petrol, kerosene and diesel prices need to be hiked by around 90%, 8%, 300% and 50%, respectively, in order to offset the losses of oil marketing companies which sell these fuels at subsidised prices," Nomura said.
Nomura said margins are under pressure compared with average high levels "suggesting that if input costs do not fall, a further rise in output prices is likely".
"A global shortage has pushed up cocoa prices, which should propel domestic coffee prices higher.
Supply disruptions in China have inflated India’s raw cotton prices by 36% so far in 2011, but cotton fabric prices are up only 10%," it said.
Nomura said that core inflation, which do not take into account price rise of food items, have also started accelerating. In March, core inflation stood at over 7%.
"We expect core inflation (non-food manufactured WPI) to accelerate to around 8% by September," it said.
The increase in core segment numbers will lift headline inflation from 8.9% in the first quarter of this fiscal, and take it further to 9.1% in Q2 and 9.6% in Q3, before moderating again, Nomura's report said.