Inflation eases, but no one’s ready to bet it’s a trend yet

Headline inflation rate based on wholesale price index (WPI) did show signs of easing when it fell to a two-month low of 8.23% in January from 8.43% in December. But not everyone’s convinced the road heads down from here. Going by the naysayers, high global commodity prices and supply side bottlenecks could throw surprises going forward. “As of now, inflation has probably peaked out. But we will need to keep an eye on global commodity prices and supply side bottlenecks,” said Anubhuti Sahay, economist, Standard Chartered Bank. A Prasanna, economist, ICICI Securities Primary Dealership, said, “In headline terms, inflation is going to ease, but the point is it would not come down too fast. It will come down only gradually.” This means inflation will continue to be a cause of concern for the Reserve Bank of India (RBI). A few economists in fact feel WPI inflation will rise again.  “February 2011 headline inflation can rise back to about 8.50%. Even though food inflation is now easing, non-food inflationary pressures remain strong on the back of rising commodity prices globally, especially energy,” said Gaurav Kapur, senior economist with the Royal Bank of Scotland NV. The strength of inflationary pressures is visible from the fact that despite a significantly high statistical base effect of almost 1.5%, the headline inflation in January eased by just about 20 basis points, Kapur pointed out. According to the economists, inflation will be above RBI’s comfort zone of 7% by March and will be hovering in the 6% zone for the entire 2011, forcing the central bank to keep hiking rates further. “Inflation will be about 6% pretty much during 2011 due to which RBI will be concerned,” Prasanna said. Siddhartha Sanyal, chief economist for India, Barclays Capital sees March inflation numbers at 7-7.5%. “Talking about the bigger picture, the stickiness in inflation still remains. In FY12 also, the inflation will remain sticky,” Sanyal said. All the economists DNA spoke to expected the RBI to go for one more hike in the repo rate and reverse repo rate, of 25 basis points each, in the next mid-quarter review of monetary policy to be held on March 17.