WPI inflation heads north over costly food, more restriction for RBI MPC

Source :Sify
Author :Finance Desk
Last Updated: Wed, Oct 14th, 2020, 17:17:11hrs
WPI Inflation

New Delhi: The Wholesale Price Inflation, an economic indicator, for the month of September was reportedly high. Data related to WPI was announced by the Commerce Ministry on Wednesday.

The ministry said annual rate of inflation based on wholesale prices rose by 1.32 percent in September from 0.16 percent in August from (-) 0.25 percent in July.

This essentially was driven by a steep rise in cost of food, primary articles and manufactured goods' prices.

The ministry said, "The annual rate of inflation, based on monthly WPI, stood at 1.32 percent (provisional) for the month of September, 2020 (over September, 2019) as compared to 0.33 percent during the corresponding month of the previous year," the Ministry said in its review of 'Index Numbers of Wholesale Price in India' for September.

On a sequential basis, the expenses on primary articles, which constitute 22.62 percent of the WPI's total weightage, increased 5.10 percent from 1.60 percent in August 2020.

Furthermore, the prices of food items remained at elevated levels with a rise of 6.92 percent from 4.07 percent reported for August.

On Monday, the CPI numbers also showed an uptick with the barometer spiking to 7.34 percent in September from 6.69 percent in August. This still remains beyond the inflation targets of the Reserve Bank of India. The RBI targets inflation within a benchmark of 4 percent (plus or minus 2 percent).

Though non-comparable, India had recorded a retail price inflation of over three percent in the corresponding period of previous year.

Two industry reports that Sify.com received so far suggest that the higher WPI inflation numbers could restrict the Reserve Bank from passing on any interest rate cuts.

The RBI monetary policy committee in its recent two outings has been discouraged from reducing interest rates. For those who wonder why the RBI is pushing for rate-cuts, the general consensus across central banks is to reduce rates so as to make borrowing an easier proposition. The US Federal Reserve too has reduced interest rates and in the words of US Federal Reserve Chief Jerome Powell, the US Fed has hinted that it would do "whatever it takes" to control the economy.

A report from Rahul Bajoria, Chief India Economist from Barclays India says "we have increased our inflation forecasts and now see CPI averaging 6.0 percent in FY20-21, which is slightly higher than RBI's estimate of 5.8 percent. With inflation still above the central bank's comfort zone, the room to ease rates will open up only in Q1 21. The central bank could continue to ease financial conditions in the economy though regulatory and liquidity measures."

Elior India Managing Director, Sanjay Kumar also espoused similar concerns. In a note he revealed that it limits scope for intervention of the RBI for reducing interest rates. And, secondly "it force-puts a dampener on consumption because of the fact that the tax-paying population is already under stretch due to job losses and the economic contraction."