Expert Views: Headline inflation surges to 14-month high

MUMBAI Mon Dec 16, 2013 12:49pm IST

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MUMBAI (Reuters) - India's headline inflation surged past analysts' expectations to a 14-month high of 7.52 percent in November, government data showed on Monday, after food prices rose at the fastest clip since June 2010.

The wholesale price index's annual rise compared with a 7 percent jump forecast by economists in a Reuters poll. In October, wholesale prices, India's main inflation measure, rose 7 percent.

Food prices rose 19.93 percent year-on-year in November, faster than an annual rise of 18.19 percent in October.

COMMENTARY

DARIUSZ KOWALCZYK, SENIOR ECONOMIST EX-JAPAN ASIA, CREDIT AGRICOLE CIB, HONG KONG

"The high print means RBI has to hike rates or lose credibility after it reacted negatively to the CPI data last week. However, the rise in inflation is purely food-price driven.

"Rate hikes will not correct food prices, the hawkish intention is a mistake, in our view, and will lead to slower growth, which will also pressure the INR. INR assets should fall across the board after the print. We remain highly negative on the INR and see 72 at the end of calendar '14."

A PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI

"The surprise in the headline number is largely due to food inflation though manufacturing inflation is well behaved. So I don't think RBI should overreact to this data. Our view is RBI will raise rate by 25 basis points to 8 percent at the policy review and pause. Now that the headline inflation has moved up they need to be seen doing something."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"I still think the RBI will increase the policy rate by 25 basis points for now. I am looking at a total 50 bps of hike for the financial year. I don't think the government will be completely averse to a rate hike as it has said that inflation remains its biggest worry."

UPASNA BHARDWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI

"With a broad based rise in inflation across segments, we expect RBI to address the issue by hiking policy rate by 25 bps this policy. We had earlier expected them to pause. While food inflation has been the key driver, the forward guidance by RBI would remain biased towards anchoring inflationary expectations and monitoring the food price trajectory."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"The pressures are across the board. Rupee depreciation, diesel price increases are all pushing up inflation. If the RBI really wants to have effective monetary policy transmission, they should hike CRR (cash reserve ratio) by 50 bps as liquidity is sloshing around and that is adding to aggregate monetary demand.

"Earlier I was expecting only 25 bps hike in repo rate but now I am looking at either a 50 bps CRR or a 25 bps hike in repo and 25 bps in CRR. Going by the experience so far, only a repo rate hike will not pressurise banks to increase their lending and deposit rates.

"Inflation is a politically sensitive issue and since the first round of state polls have largely gone against the government they will focus on inflation and work in coordination with the government to try and bring inflation down."

SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI

"As expected, the spike was largely due to persistent price pressure across all the indices. With elevated price level and spill over probability of higher food and service prices to core inflation, we believe the central bank will to stick to its anti-inflationary stance with one more rate hike on forthcoming policy meet.

"Simultaneously a weaker growth might prompt the RBI to maintain its liquidity supportive measures. Post-December, the rupee movement, impact of crop outputs and government approach in keeping the house in order would play a vital role in framing the policy tone."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"We are now expecting 25 basis point rate hike, and we have brought forward what we were expecting in the last quarter. Going forward, the month-on-month momentum, which has built up on account of food, will show fair correction.

"At this point in time, with this data, the upward revision plus the CPI data, warrants bringing ahead of a rate hike of 25 basis points. We also believe he (RBI governor) may continue to support liquidity in the banking system."

ARVIND CHARI, HEAD FIXED INCOME AND ALTERNATIVE, QUANTUM ADVISORS, MUMBAI

"Headline inflation numbers are high, again driven largely by food inflation. We now know that onion and tomato prices are down quite a bit in the wholesale markets in Nov/Dec, which will be factored. Manufacturing inflation increase in sequential terms was lower than previous months which is a good sign besides a more stable INR, which should reflect in manufacturing inflation going forward.

"We do expect RBI to look through these increases but it does not change our view of a 25 bps hike in policy rates on Wednesday followed by a pause till April."

SAUGATA BHATTACHARYA, CHIEF ECONOMIST, AXIS BANK, MUMBAI

"The bulk of the probability is still a 25 basis point rate hike, but given the significantly higher CPI and WPI number a 50 basis points cannot be ruled out. We expect the language of the statement to be very tough.

"Earlier we were expecting the RBI to pause in December policy and raise the rate to 8 percent in January, but after the CPI and WPI data we expect two more rate hikes -- one in December and another in January taking the repo rate to 8.25 percent."

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI

"What I can say is that the WPI does not give any room for comfort so I think based essentially on the CPI, there will be rate action, and we are expecting 25 basis points. I think there could be some dissipation in food prices in December, although that might not help the WPI much because there is an adverse base effect at play. The CPI can come down sharply from last level.

"Going forward the RBI's actions will be data dependant rather than some predetermined action on the trajectory of inflation.

"The irony is that raising rates isn't helping and I think the government will have to get down to more active supply management because the problem is largely with vegetables and meat and fish, which is the protein basket.

"Perhaps the government needs to participate more through open market operations in food rather than putting the ball into RBI's court because that's not going to work. It might just work adversely for voters if they on top of all these things, see interest rates going up as well. I don't think there's a compelling case for the government to get the RBI to try and quell inflation through rate hikes."

MARKET REACTION

-- The benchmark 10-year bond yield rose 3 basis points to 8.94 percent from levels before the wholesale inflation data.

-- The 1-year overnight index swap (OIS) rose 5 bps to 8.57 percent, while the 5-year OIS rose 4 bps to 8.53 percent.

-- The benchmark BSE Sebsex fell marginally after the data.

(Reporting by India Treasury and Markets Teams)

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