August CPI Fades Rate Cut Hopes

Due to the soaring vegetable, sugar and edible oil prices, the CPI inflation has come in double digits for the month of August. The data showed that inflation measured as CPI (consumer price index) has climbed to 10.03 per cent in August 2012 from 9.86 per cent in July 2012. In the rural areas, the CPI inflation jumped by 14 basis points to 9.9 per cent while that in the urban areas surged by 9 basis points to 10.19 per cent in August 2012.

The data showed that at an all India level, high inflation rate was recorded in vegetables (20.79 per cent). The rise in the vegetable prices has been due to the lower-than-average monsoon in the country. Oils & fats and sugar also were showing a high jump in the inflation level at 18.41 per cent and 17.51 per cent respectively. In the urban area, a steep rise in inflation was seen in pulses which grew by 22.85 per cent. Commodities, however, have shown a price decline in the urban areas and the rest of the categories have shown a rise in the prices.

Overall, food and beverages have shown a rise of 12.03 per cent rise in the prices. Fuel and light inflation rose by 7.55 per cent while clothing, bedding and footwear category showed a rise of 10.71 per cent in inflation. Earlier, in the last week the WPI numbers showed a rise in inflation from 6.87 per cent to 7.55 per cent. The recent diesel hike, capping the LPG cylinder and high liquidity, will only force the inflation upward in the next few months. The RBI has also made it clear that its priority is inflation and any rate cut probability diminishes from here. Due to all these events, we may see inflation touching about 8 per cent by the end of the year. One should not ignore the big spending festive season in the next three months.

The RBI in the recent monetary policy review has cut the CRR by 0.25 per cent in order to increase the liquidity. Going ahead, we may not see the RBI taking bold measures of cutting the key policy rate and it may opt to see how growth accelerates after the host of measures that the government has announced.