INFLATION - ELATION WITH TREPIDATION
By Ruma Dubey
The January headline inflation number at 6.55% v/s 7.47% in Dec came as a relief. It was a relief because it was on expected lines and there were no unpleasant surprises. The good part was that manufacturing on a MoM was down at 6.49% v/s 7.41% but YoY, it continues to remain a cause for concern as it was at 5.32% in Jan 2011.
Among manufactured items, cement and lime along with base metals, alloys and metal products, iron and semis saw significant increase.
Food inflation was negative at -0.52% which in Jan 2011 was at a high at 16.68%. Whew! At least we are not where we were in Jan last year! The lower prices of wheat, vegetables, potato and onions pushed down the food price index.
Yet, what could topple this entire cart is the rising fuel prices. Inflation in the fuel and power segment stood at 14.21% v/s 14.91% in the previous month. And that is indeed a concern which will vex the RBI in the coming months. It is like pushing things under the carpet – you clear one end, things start poking out from the other end. After 13 rate hikes of 300 bps, we have a grip on food prices but fuel is now raising its ugly head.
If we need development and push out recession in the West, fuel prices are sure to rise. Crude has today crossed $100/barrel mark after the Greek worked out a austerity plan and mounting tension that Iran will disrupt oil supplies any time now. Futures are up 17% from a year ago. Brent oil for March settlement rose 90 cents, or 0.8%, to $118.21 a barrel on the London-based ICE Futures Europe exchange.
On the domestic front, we are seeing the fuel prices steady only because of the ongoing elections in the five states. Once that is over, in March, if oil prices remain high, one can brace for a rate hike. There is talk of a hike as steep as Rs.3/litre but that might be too drastic even for the fledgling UPA.
And a hike in fuel prices means a surge in overall prices. Fuel makes up for 15% of the WPI basket and hike in petrol, coal and electricity prices will pump up headline inflation.
Apart from fuel prices, we need to keep a watch on Food Security Act. If that gets implemented in the Budget, which in all likelihood it will, then we can see a spike up in food inflation too.
Yes, January might be an easy month for Mr.Subbarao but coming months could once again put the RBI Governor on the tightrope, walking with trepidation.
Thus under the current circumstances, we can rejoice the Jan inflation if we decide to just live for the day. But if we want to be more pragmatic and show foresight, the coming months do seem challenging on the inflation front. Under the present circumstances, it seems unlikely that the RBI will reduce rates in March. At the most we could see a cut in the CRR but a rate cut at this juncture, would be too premature and might undo all the work done by the 13 rate hikes.