Inflation surges to 7.31%

India’s inflation, as measured by the Wholesale Price Index (WPI), stood at 7.31% for December 2009 compared to 4.78% in the previous month and 6.15% during the corresponding month of the previous year. Inflation for the Food Articles group rose to 3.11% in December 2009 compared to 2.70% in the same period last year. Non-Food Articles inflation rose to 0.48% as against 0.12% in December 2008 and Minerals inflation was at -0.06% as compared to -0.03% in Dec 2008. The latest inflation figure is way above the RBI’s target for the fiscal year (6.5%), reinforcing a growing view that the central bank would resort to some form of monetary tightening at its month-end policy meeting in a bid to contain rising prices. According to some economics, at the current pace, inflation is likely to rise above 8% in January and inch closer to double-digits by March, 2010. The last time wholesale inflation exceeded the December level was in November 2008 when it had reached 8%.

Inflation in manufactured products, which has a 63.5% weightage in the index, was up 5.17% in December 2009 from a year ago. It was 3.99% in November 2009. Basic grades of steel rose 9% while zinc was up 4%. The price of potatoes more than doubled in December from a year earlier while sugar prices soared 53.9%, according to government data. The fuel index gained 4.29% compared with a decline of 0.21% a year earlier. Prices of processed food items, for example, rose 26.40% in December and non-processed food items turned expensive by 19.17%. There is some relief however on food prices. The rate of price acceleration in food articles has moderated to 17.28% from about 20% earlier.

The RBI cut the CRR, the portion of deposits to be kept with the RBI, by 4% to 5% between October 2008 and January 2009 and has left its reverse repurchase and repurchase rates unchanged since April after cutting them by 2.75% and 4.25%, respectively.

India’s central bank will use monetary policy to contain inflation when there is a need, K.L. Prasad, an economic adviser at the finance ministry, said after wholesale prices surged the most in more than a year. "It is difficult to react to the current numbers and to take action today," Prasad was quoted as saying. "If you see the momentum and know it’s going to reach a certain threshold, then the monetary policy authorities will act," he said. Prime Minister Dr. Manmohan Singh has called a meeting with state chief ministers seeking their co-operation in the fight against spiraling inflation.