June WPI inflation surges to 9.44%, RBI may go for another rate hike

The headline inflation measured by Wholesale Price Index (WPI) for June surged to 9.44%; however the surge was on expected line as government decided to increase the price of fuel. Government also had revised upward April’s WPI inflation to 9.74% from 8.66%, after this revision headline inflation for the first half of the 2011 is hovering around 9% level.

All the three major segments of WPI increased for the month, the prices of manufacturing products stood at 7.43% in June up from 7.27% in May, prices of fuels and power increased to 12.85% in June from 12.32%, prices of primary articles increased to 12.22% in June from 11.30% in May. However, the prices of food items was more or less stable, it stood at 7.38% over 7.37% last month,

According to the data released by the ministry of commerce and industry, the Wholesale Price Index for 'All Commodities' (Base: 2004-05 = 100) for the month June, 2011 rose by 0.9 % to 153.0 (Provisional) from 151.7 (Provisional) for the previous month. The annual rate of inflation, based on monthly WPI, stood at 9.44% (Provisional) for the month of June, 2011 (over June, 2010) as compared to 9.06% (Provisional) for the previous month and 10.25% during the corresponding month of the previous year. Build up inflation in the financial year so far was 2.34% compared to a buildup of 2.57% in the corresponding period of the previous year.

On M-O-M basis, the index for Primary Articles rose by 2.8% to 197.5 (Provisional) from 192.1 (Provisional) for the last month. The index for 'Food Articles' group rose by 1.9% to 190.1 (Provisional) from 186.5 (Provisional) for the previous month due to higher prices of tea (13%), jowar (10%), milk (6%), coffee, egg and fish-marine (5% each), gram (4%), pork, fish-inland and mutton (2% each) and maize and fruits & vegetables (1% each).  However, the prices of arhar (4%), bajra, masur, ragi, poultry chicken, barley and urad (3% each), condiments & spices (2%) and moong (1%) declined.

The index for 'Non-Food Articles' group declined by 1.7% to 181.3 (Provisional) from 184.5 (Provisional) for the previous month due to lower prices of logs & timber (21%), gingelly seed (9%), raw cotton and raw jute (8% each), mesta (7%), raw silk (6%), castor seed, flowers and safflower (2% each) and sunflower and raw rubber (1% each). However, the prices of gaur seed (12%), rape & mustard seed and linseed (5% each), fodder (3%), groundnut seed (2%) and copra (1%) moved up. The index for 'Minerals' group rose by 17.2 % to 312.5 (Provisional) from 266.7 (Provisional) for the last month.

The index for the fuel and power, which has weight of almost 15% in the WPI, rose by 0.7 % to 161.6 (Provisional) from 160.4 (Provisional) for the previous month due to higher prices of kerosene (5%), petrol and LPG (4% each), high speed diesel and bitumen (2% each).  However, the prices of light diesel oil (7%), aviation turbine fuel (5%), naphtha (4%) and furnace oil (3%) declined.

The index for Manufactured Products, which has weight of almost 65% in the WPI, rose marginally by 0.1% to 137.3 (Provisional) from 137.2 (Provisional) for the previous month. Under this major group, products such as ‘Food Products, ‘Beverages, Tobacco & Tobacco Products’, 'Wood & Wood Products',  Paper & Paper Products' group, registered growth in prices for the month of June. However, products like 'Textiles' group, 'Rubber & Plastic Products' 'Transport, Equipment & Parts products showed decline in prices for June.

Earlier, RBI and government had expressed their hopes that inflation will come down to comfort level by the end of this financial year, however, the first half of year’s headline inflation is hovering around 9%. This elevated headline inflation is a major concern for country’s sustainable economic growth. Government also has revised inflation figures for the month of April, which is 9.74% from 8.66%; this revised figure showed that inflation for month of April was the highest in the first half of the current year.

Despite the slowdown in industrial output and investment rate, Reserve Bank of India (RBI) is expected to go for another interest rate hike in its upcoming monetary policy review. The RBI has continued its anti-inflationary stance for more than a year but has failed to control inflation, while the on the other hand increase in interest rate has pushed capital cost further making investment costly, resulting in a slowdown in Industrial production. IIP for month of May stood at 5.6% due to poor performance of manufacturing sector.