WPI inflation may hit double digits by August: Anand Rathi

MUMBAI: WPI inflation may hit double digits by August this year, feels domestic brokerage house Anand Rathi. The 11% hike in petrol prices adds around 34 basis points to WPI inflation. A Rs 5 per litre hike in diesel prices would add around 80 basis points directly and the same amount indirectly, taking the overall impact of the fuel-price hike on WPI inflation to around 200bps. Further, the 10% rupee depreciation since April this year and the electricity-tariff hike in many states will add to the inflation, according to the report.

High food prices have pushed up WPI inflation to 7.2% in April12, from 6.9% in March this year.

Unlike a diesel-price hike, a petrol-price hike has no significant second-round (indirect) impact on inflation. Given the fact that diesel under-recoveries are near all-time highs and this has a major impact on the fiscal deficit, the government may have to raise diesel prices if international oil prices do not ease.

"A Rs 5 per litre hike in diesel prices would add around 80 basis points directly and the same amount indirectly to WPI inflation.

The recent hikes in electricity tariffs by many states - Haryana (10-15%), Tamil Nadu (37%), Bihar (12%), Andhra Pradesh and Odisha (25% each) - have yet to be incorporated into the WPI index since the electricity index in the WPI (with a 3.5% weighting) has been unchanged since October 2011.

The report also adds that this has put R BI: between a rock and a hard place. "The RBI has been saddled with problems - slowing growth, spiralling inflation, a collapsing currency, a burgeoning fiscal deficit, structural liquidity shortage and a hostile external economic environment."

"We think restoring normalcy in currency and liquidity would be the RBI's immediate priority although policies to realize these two goals often work at cross purposes.

We expect measures on the currency front to come mainly from the Government while the RBI focuses on liquidity. Stubborn inflation, even if initially food- and fuel driven, seriously constrains any possibility of a rate cut.