Economists expect December inflation numbers to be higher than anticipated

MUMBAI: Economists expect inflation to be higher than anticipated earlier. Two leading foreign banks have revised their December forecast upward on concerns over rising food prices.

While Standard Chartered Bank has revised its outlook on inflation to 8.3% from 7%, Citi estimates December inflation to touch 8.4% compared with its earlier estimate of 7.5%. Official inflation figures will be released later this week. Inflation, as measured by annual variation in wholesale price indices, or WPI, is expected to remain within the range of 6.5-7 .0% by March 2011.

As a result, expectations are that the Reserve Bank of India may raise its key policy rates. “We expect a 25 bps rate hike at January policy meeting, 50 bps more in rest of 2011,” said Standard Chartered in a note to clients. A Citi note to clients says: “We expect RBI to hike rates on January 25.”

“With inflation remaining above RBI’s comfort level for an extended period, the central bank needs to demonstrate a strong resolve to tackle inflation in order to maintain its credibility . This could in turn push up inflation expectations ,” says the StanChart report.

Planning Commission deputy chairman Montek Singh Ahluwalia had said in a recent media interaction in Delhi that inflation is likely to be in the comfortable zone by the month of March 2011.

Spiralling food prices have caught the media’s attention for more than a month now. One of the key factors contributing to higher domestic inflation has been unseasonal rains in Tamil Nadu, Maharashtra and Karnataka, which affected production of several crops.

Chief economic advisor to the finance ministry Kaushik Basu recently pointed out hoarding and speculation, as well as inherent flaws in the agri distribution system — a high price differential between retail and farmgate prices — are also a cause. The government has taken a host of measures over the past few weeks.

These include releasing tonnes of rice and wheat from buffer stocks, banning onion exports and removing import duties, extending the ban on pulses exports and zero duty on pulses imports till March 2012, continuing with a stockholding limit on sugar for the next three months to keep prices in check.