Inflation rose 0.68 percentage points to 7.55 per cent in August from 6.87 per cent in June, dividing experts on whether the Reserve Bank of India would cut policy rate on Monday.
After industrial production grew by just 0.1 per cent in July, as announced on Thursday, expectations grew that the central bank would cut policy rate at the mid-quarter monetary policy review.
While food inflation declined to 9.14 per cent in August from 10.06 per cent in July, the rate of price rise in manufactured products was up at 6.14 per cent against 5.58 per cent. This point was used by some economists to claim that RBI would not change policy rate on Monday.
Another issue was revision in inflation rates. June inflation was revised to 7.58 per cent from 7.25 per cent. So, there was clearly an upside risk to inflation. Besides, the government’s moves to increase diesel price and cap subsidised LPG cylinders yesterday are expected to add another 1.5 percentage point to inflation, once full impact on prices, including indirect ones, was realised.
Business chambers, however, continued to call for a rate cut and have asked RBI to contribute its bit to fuel growth, after the government initiated action to cut fiscal deficit.
Among food articles, inflation in wheat showed a sudden jump to 12.85 per cent from 6.67 per cent, but prices of vegetables fell by 9.98 per cent against 24.11 per cent. Prices of egg, meat and fish, and milk showed a decelerated rise. Among manufactured items, food items (processed) rose significantly to 9.01 per cent in August from 6.25 per cent. A major reason was sugar, which recorded a price rise to 16.15 per cent from 7.91 per cent.
Edible oils inflation rose to 10.47 per cent from 10.37 per cent.
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That is why, core inflation (inflation in non-food manufactured items) rose, but not significantly.
It was up at 5.58 per cent in August from 5.45 per cent in the previous month.
Among other manufactured items, cement and lime saw inflation rising to 13.36 per cent from 10.72 per cent. This seemed to be continuation of uptick in construction activities, seen in the first quarter GDP data. Construction grew almost 11 per cent in the first quarter of this financial year against over 3.5 per cent in the corresponding period last year.
Non-metallic mineral products prices rose by 9.76 per cent in August from 8.12 per cent in the previous month.
Inflation in fuel and power rose to 8.32 per cent from 5.98 per cent. However, economists were surprised as the official release showed electricity for industry witnessing inflation of 11 per cent in August and that supplied to domestic purposes at nine per cent.
YES Bank chief economist Shubhada Rao said several state electricity boards increased tariffs in April-May. On closer scrutiny, she said it was found that electricity index was revised in June and not in August. “The discrepancy arises because July electricity index continues to remain unchanged, while higher electricity prices get reflected in both June and August.”
The government’s decision yesterday to raise diesel price and cap subsidy on LPG cylinders may also raise inflation from September, which may dissuade RBI to cut repo rate, some economists said.
The Planning Commission does not agree. “I am sure RBI would factor in the fiscal space created by diesel hike and cap on LPG cylinders, and that continuing with the high subsidy was not a feasible option,” Planning Commission Deputy Chairman Montek Singh Ahluwalia said.
He said the government’s decision would give enough leg room to RBI to rationalise interest rates.
CARE Ratings chief economist Madan Sabnavis said RBI may spring a surprise on Monday as government initiated the process of fiscal consolidation. “The RBI may changed its goalpost from inflation to growth,” he said.
YES Bank’s Rao, however, said she does not expect RBI to cut policy rate in its mid-quarterly review. “We expect the RBI to cut repo rate by a cumulative 50 basis points in the third quarter of 2012-13.”