The wholesale price index (WPI) rose an annual 8.43% in December on higher food prices, as per government data. The figure compared with the median forecast for an 8.35% rise in a Reuters poll and was higher than the annual rise of 7.48% in November, which was its lowest level in a year.The annual reading for October was upwardly revised to 9.12% from 8.58%.
Meanwhile, India's annual industrial output had slumped to 2.7% in November from 11.3% growth in the prior month.
Annual food inflation in December accelerated to 13.55% from 9.41% in the prior month, following a rise in prices of onions and other vegetables. Vegetable prices have risen more than 70% in the past year in India, prompting the government to curb exports and ease import restrictions on all essential commodities.
The current level of food inflation in India is not acceptable, Finance Minister Pranab Mukherjee acknowledged.
The Reserve Bank of India (RBI) has repeatedly noted overall inflation continues to be above comfortable level, and its head has said the central bank's pause in its monetary tightening cycle was a "comma and not a full stop".
The central bank raised key lending and borrowing rates six times last year, and is widely expected to raise rates by 25 basis points each again when it reviews policy on January 25.
According to Jehangir Aziz of JPMorgan, RBI may lose the plot if it does not act aggressively at this point in time. “There is this denial in India that food inflation is supply driven. It is true for developed markets where food demand doesn’t move very much but in a country, which has a per capita income USD 1,000 and is moving at 9%—food inflation is not just supply driven but by demand,” he pointed out. Aziz said though 25 bps is a given, he is hopeful that RBI may deliver 50 bps rate hike.
Meanwhile, Abheek Baruah of HDFC Bank is expecting at least three hikes of 25 bps each over the next six or seven months, even four if things spin out of control. “The RBI has to make sure that inflation in food doesn’t translate into inflation in other articles,” he explains.
"Inflation is no longer restricted to food price but is spreading to manufacturing sectors as well," said Hitendra Dave, head of global markets at HSBC in Mumbai.
"The RBI should hike rates by 50 basis points in January," he said.
While RK Bakshi ED of Bank of Baroda says, that the house view was that there should have been a hike in the December policy. “I will again not put a number to it but the view was that if you are not doing then we may have to do it more next time.”
The International Monetary Fund early this month said India needs to speed up its return to pre-crisis monetary and fiscal policies to help bring down elevated inflation.
