Will Rate Hikes Work?

by Manas Chakravarty/ BWI

Inflation according to the Wholesale Price Index (WPI) is at a one-year high but as the base effect takes effect in a couple of weeks, the price rise is likely to moderate.

On 10 June 2006, the WPI inflation rate rose to 5.24 per cent. Not all of it is due to higher fuel prices. Consider the numbers: while the year-on year (y-o-y) rise in the index for petrol prices has been 25.28 per cent, the increase in the index for pulses has been a huge 34.75 per cent. The price of some pulses like urad and moong has been much higher. Small wonder then that the government has tried to keep prices in check by imports. The move has already had an impact, with prices dipping in the commodity futures market.
There have been allegations that part of the reason for price rise lies in speculation, something denied by commodity traders. Says Kushal Thaker, chief of Commodity Futures Traders & Investors: “Potato prices have crashed since futures were introduced. So should we get the credit for that?” He also points out that a genuine supply shortage in pulses prompted the government to import.

But Ajit Ranade, chief economist of the Aditya Birla group, points out that wheat prices are higher because of two reasons: stagnation in production in the last few years; and farmers not selling their wheat to the government, because higher futures prices convinced them that they would be able to get a better price later.
The index for vegetables, too, has gone up 12.82 per cent in a year. Potatoes are dearer by 27.83 per cent, while the humble brinjal costs 36 per cent more than it did a year ago. Nor does the story end there — as the table shows the prices of other food items such as fresh water fish and spices, too, have seen inflation in the high double digits.
Nevertheless, the rate of WPI inflation is expected to go down at June end/mid-July because that is when there was a jump in the WPI last year. That base effect should help the headline inflation number. “The spurt in vegetable prices is seasonal,” says Abheek Barua, chief economist, ABN Amro India.
Competition and the opening up of the economy has ensured that the price index of manufactured items has shown a very modest increase of 2.9 per cent, although in some pockets price rise has been higher, such as the cement industry. But even here the trend is higher. For example, the index for manufactured products was showing a rise of around 2.1 per cent y-o-y in January. Clearly, purchasing power is coming back to manufacturing units. But with fuel and food costs rising so sharply, which in turn will drive wages higher, companies will see additional pressure on their margins.
Although the RBI has raised interest rates as a response to inflationary pressures, the inflation we are seeing is cost-push and raising interest rates is of no help. There has also been talk of a global rise in inflation, but apart from the impact of fuel prices, which is admittedly large, many of the other factors are purely local and temporary. In fact, the global Economist commodity index for food shows a y-o-y rise of a mere 0.3 per cent.

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2 Responses to Will Rate Hikes Work?

  1. Anonymous says:

    Toughie,the new look is way too cool man…keep up the good work

  2. toughiee says:

    thx!

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