Archive for January, 2011

Ask the women who run their household, an industrialist who wants to apply for an industrial loan, a consumer who wants to buy durables or a house. They will all begin by saying that inflation has steadily creeped into their pockets and is eating away their budgets, their profits, etc.

A household lady says Rs.500 fetches one a small packet of vegetables (consisting of 2-3 vegetables) and another Rs.500 for fruits and another Rs.1,000 for the ration (including Wheat+pulses). A total of Rs.2,000 on food items , this is quite high compared roughly 23% to the amount spent on the food items in 2008…This indicates that inflation has affected our household in a huge manner..the rates of food inflation linger at 15% and more, theyeby increasing our expenditure on food..We are seeing that necessities are becoming expensive and are coming at par with luxuries…For example, a litre of petrol, a kg of onions and a litre of liquor (beer) costs the same around Rs.60-65/-.

A look at the consumer segment – buying houses and vehicles reveals that rising interest rates are expected to affect the buyers pocket. Housing loan rates have been witnessing a rise over the past two quarters, consumers who have taken a housing loan worth Rs.2,000,000 will witness a rise of Rs.350-400 per month in their EMI’s (Equated Monthly instalment). Similarly, when a consumer decides on buying an automobile the expected rate hike (25bps) will pinch him further…For example if he takes a loan of Rs.300,000 he will have to pay Rs.60 more every momth or Rs.800 annually. This will dissuade a number of buyers from purchasing a house or going in for new vehicles..

On the industrial front, esp manufacturing companies the bottom line has been affected due to rising interest rate costs, input costs, etc. Over a period of one year, the fuel prices have increased more than 12%y/y, cost of industrial machinery has increased 7%y/y and input costs have risen in the same range. This has affected the margins slightly with expectations of further rate increase to pressurise the profit margins. 

Thus whether it is consumers or industries rising inflation continues to pinch their pockets…


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Inflation continues to remain a pressing issue faced by the Indian economy. Over the past year, inflation numbers have remained in the double digit figures with the Reserve Bank of India (RBI) following a calibrated approach to fine balance economic growth and liquidity. A look at the RBI policy reviews indicate that the rates have been increased six times during 2010 with a few experts stating that RBI has been behind the curve while implementing inflation control measures.

Over the last quarter of CY 2010, the Wholesale Price Index (WPI) inflation eased slightly during October (c16.7%) and November (c13.0%). However, the month of December saw a sudden spurt in inflation figures touching c17% due to a rise in prices of food items and petrol. Food inflation hovered in the double digit range of 12% – 14% during Q4 CY2010 owing to unseasonal rainfall in Maharashtra. This resulted to a damage of Kharif crops creating a temporary demand supply gap.

Adding to the existing woes, an increase in international crude oil prices led to a domestic petrol hike. In continuance with its efforts to curb inflation, the central bank increased the repo and reverse repo rate by 25 basis points at the start of November 2010. However, as inflation moderated in November, RBI left the key policy rates unchanged at 6.25% and 5.25% respectively in its December 2010 policy review.

Going forward, RBI is expected to increase the rates once again by 25 basis points in January 2011. However, looking at the present situation, RBI’s target of 5% inflation rate by March 2011 seems slightly difficult to achieve despite expectations of a sufficient domestic crop supply in Q1 CY 2010; the inflation figures are expected to settle at around 6%-7%. 

Chart: Wholesale Price Index (WPI) and Consumer Price Index (CPI)

Source: Economic Adviser Industry and MOSPI

Base Year: 2004-05

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