Even as policymakers might take a sigh of relief at the moderating trend of wholesale inflation, which stood at 7.48 per cent for November, inflationary concerns are far from over for the government.
If the current scenario is taken into consideration, headline inflation, as measured by the Wholesale Price Index (WPI), is facing upside risks from all quarters — domestic structural issues due to an increased demand-supply mismatch coupled with imported inflation (global inflationary pressures) on account of high fuel and commodity prices.
The only thing that is bringing the inflation rate down and is expected to keep the moderating trend is the high statistical base effect of 2009-10, which is expected to run its course by the end of the current financial year making 2011-12 a more challenging year for inflation management.
Economists also say an average inflation rate of 6-7 per cent, seen in India in the 1990s, is also a result of high growth liberalised economy, which has to tackle both domestic structural shocks and international price fluctuations.
“Inflation of the kind that we are seeing in India now is also a result of an accommodative stance of the developing or emerging market which impinges on the monetary stance as well,” said Shubhada Rao, chief economist, YES Bank.
Food inflation had maintained a moderating trend since October, due to increased supplies from the kharif harvest. It had come down to single digits at 8.69 per cent in the last week of November. However, it has shown an upward trend in the first week of December to 9.4 per cent.
“Inflation is currently facing risks from all sides and the risks continue to grow, as is evident from the Reserve Bank of India’s (RBI’s) inflationary expectation survey. Prices of fuel and non-food articles are on a rise, while food articles are also under pressure due to unseasonal rains that have disrupted supplies and delayed sowing,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.
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Crude oil prices, which have witnessed a 14 per cent rise in the last six months to stand at $85 per barrel in November (Brent crude), coupled with an increase in the prices of administered fuel items like petrol and an expected increase in diesel price, are expected to fuel the overall inflation further.
“A $1 per barrel increase in oil prices increases the trade deficit by $700 million and raises oil companies’ recovery by a similar amount. As far as inflation is concerned, the impact is a bit difficult to quantify though prices of petrol and industrial fuels are market determined, price adjustment takes with a lag… the downward trend in inflation may not last long,” notes Citigroup economist Rohini Malkani in a research note.
“RBI is vigilant about this kind of pressure from the global commodity market and its measures are in the direction to control these pressures… But even then, we think that inflation by the end of March would be higher than RBI estimate (5.5 per cent)”, said D K Joshi, chief economist with ratings agency Crisil.
Another consistent component fuelling inflation in the current financial year has been the non-food category in the primary articles group, which has seen a 4 per cent rise in November on a sequential basis.