CRISIL - Economy FirstCut Inflation: Rate hike in sight as inflation surges

WPI inflation rose to 7.5 per cent in November – 14-month high, from 7.0 per cent last month. Consumer price inflation (CPI) for November also soared to 11.2 per cent from 10.2 per cent in October. Crucially, core inflation, measured by CRISIL core inflation indicator (CCII) as well as non-food manufacturing inflation rose marginally in November (Figure 1). As a result of rising price pressures, Reserve Bank of India (RBI) is likely to raise the repo rate by 25 basis points to 8.0 per cent on December 18 in its monetary policy review, despite a still-shrinking industrial sector (the index of industrial production fell by 1.8 per cent in October).

WPI inflation rose in November (Figure 2) with prices increasing at a faster pace across all categories - fuel, food articles, non-food articles and manufactured products. Momentum indicators (Figure 3) suggest that while inflation in primary articles is likely to moderate in the coming months, inflation in manufactured products could accelerate further. Momentum in manufactured product categories - food, textiles, basic metals, alloys and metal products, shows an upward trend, partly reflecting the adverse impact of the weak rupee on imported inflation.

With a weak rupee and rising fuel prices, margins of producers are under stress. The extent of rising input costs being passed on to consumers is likely to rise further, especially if household consumption begins to improve, following a normal monsoon, and a consequent increase in farm incomes. Given the rising inflation - both at the retail and wholesale level, the RBI with inflation control as its prime objective, is set to hike the repo rate once again later this week.

Source : Equity Bulls

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