WPI inflation at five-month high in July

NEW DELHI: Headline inflation rose to a five month high in July, pushed up by a steady increase in fuel prices because of the weaker currency and double-digit rise in food prices, creating more headaches for the UPA government that faces elections in about nine months.

The wholesale price index (WPI) inflation rose to 5.79% in July from 4.86% in the month before, data released on Wednesday showed. Inflation for May was revised down to 4.58% from 4.7% estimated initially.

“Vegetable prices may reverse and demand remains weak, but a weak rupee and adverse base effects will likely drive WPI inflation above 6% in the coming months,” Nomura economist Sonal Varma said in a note.

The over 12% depreciation of the rupee against the dollar since May has, according to private estimates, added up to two percentage point to the inflation, taking it above the Reserve Bank of India’s comfort range of 5%. The government and the RBI announced more measures on Wednesday to check the current account deficit and support the Indian currency that closed at record low of Rs 61.43 to the dollar. The government had increased the import duty on gold to 10% from 8%.

Food inflation climbed into double digits again after a four months respite, rising to 11.91% in July from 9.74% in June. Fuel inflation, driven largely by the steadily rising diesel prices, rose to 11.31% in July from 7.12% in the month before.

The rate of price rise on nonfood manufactured products, which is considered a key measure of demand, went up marginally to 2.81% from, 2.75%.

The government hoped the good monsoon and stable currency should help moderate inflation. “With currency appearing to stabilise, I don't expect this (effect on inflation) to continue. I think if we can get moderation on food front once the impact of good Monsoon becomes available, I think we will end the year between 5 and 6% which we have predicted earlier,” Deputy Chairman of planning commission Montek Singh Ahluwalia told reporters.

Analysts did not expect the rise to sustain because of the weak economy and expect the Reserve Bank of India to begin monetary easing once the rupee stabilized. “With the Fed not expected to begin 'tapering' until year-end, RBI should roll back its 'quantitative tightening' measures quickly as the INR stabilises. Repo rate cuts could then resume by year-end,” said Mole Hau of BNP Paribas adding that the overall food price inflation is likely to have peaked.