Rising vegetable prices to push up WPI inflation, says Nomura

MUMBAI: Owing to rising vegetable prices and weakening rupee, global brokerage firm Nomura has revised its average wholesale price index (WPI) forecast for FY14 to 5.7 per cent from the earlier 5 per cent.

According to Nomura, higher food prices, weak domestic demand and depreciating rupee may even drive the WPI inflation above 6 per cent in the coming months.

Rising for the second consecutive month, inflation shot up to 5.79 per cent in July, driven largely by double digit rise in prices of food articles, mainly vegetables, including onion.

Inflation based on WPI stood at 4.86 per cent in June. In July 2012, it was 7.52 per cent. On August 14, rupee closed at 61.19 against the dollar. "Core inflation rose in July, led by higher textiles, chemicals and leather products prices," the firm said in a report here.

Vegetable price inflation jumped to 46.6 per cent in July from 16.5 per cent in June, led by a steep increase in prices of onion and potato.

"This (vegetable inflation) will continue to be higher in the next month as well, considering that onion prices have continued to ascend in August," it said.

Similarly, mineral oil price inflation shot up to 16 per cent in July from 9.6 per in June as rising global crude prices and a weak currency have resulted in oil rates jumping to an all-time high in rupee terms.

This trend has persisted in August, suggesting fuel price inflation will also continue to inch higher, it said.

Nomura, however, expected vegetable prices to drop later in the year. "Vegetable prices may reverse (uptrend) and demand may remain weak, but a weak rupee and adverse base effects will continue to drive input costs higher, which is likely to drive the WPI to 6 per cent in coming months."

"We do not see demand-driven inflation as a problem. In the current demand environment, supply shocks such as rupee, commodity prices and food inflation will be the main drivers of inflation. High food price inflation remains the key structural irritant," the Japanese brokerage said.

Nomura observed that monetary policy has been hijacked by financial stability considerations with growth-inflation dynamics taking a backseat.