What should RBI's strategy be for the upcoming policy review?

Providing some respite to a battered economy, the WPI data announced by the govt. on Dec 9, 2011, saw a steep fall in food articles to 6.6% for the week ended Nov 26, as against 8% in the previous week. Consequently, the primary articles inflation also came in at a comfortable level of 6.92%, as against 7.74% in the previous week. The fuel and power articles' inflation remained unchanged at 15.53% in comparison with the last week.

According to govt. data, vegetables became cheaper by 1.25% on a YoY basis, led by a sharp fall of 39.2% in the prices of onions and 15.75% in potato prices.

Among other food items, cereal became expensive by 1.68% (YoY), led by a 2.34% rise in the prices of rice. However, a 4.7% fall in wheat prices limited the rate of increase. Pulses grew costlier by 13% (YoY).

On a weekly basis, the prices of fish (inland) and jowar fell by 3% each. Those for fruits and vegetables, condiments and spices, masur and urad fell by 2% each. Prices for fish (marine), poultry chicken, barley and moong fell by 1% each. However, the prices of ragi (3%), pork (2%) and gram, mutton, maize, egg and arhar (1% each) all moved up.

Now this latest set of weekly inflation data for Nov 2011 has shown a clear declining trend, where primary articles have fallen from 10.39% on Nov 5 to 6.92% on Nov 26. Food articles have also retreated from 10.63% at the start of the month to to 6.6% at the end. Fuel and power have, however, not shown any signs of abating. This does add a bit of pressure to the overall inflationary expectations, given that they carry a weight of 14.91% in headline inflation data calculation.

Moving on, the next week is expected to be crucial on the macro front, as all eyes will be on the headline inflation data and industrial output data. These data sets could also provide the final cues on the RBI’s possible stance in its policy review scheduled for Dec 16, 2011.

Judging by the steep fall witnessed in the WPI for primary articles and the stiffness seen in the WPI for fuel and power in Nov 2011, and maintaining similar inflationary projections for manufactured articles as seen in Oct 2011, we expect headline inflation to come in at around 8.7% for Nov 2011.