InvestorQ : Do you see the falling WPI inflation making the RBI go slow on interest rate hikes?
Dia Deshpande made post

Do you see the falling WPI inflation making the RBI go slow on interest rate hikes?

swati Bakhda answered.
3 weeks ago

WPI inflation for August 2022 came in at 12.41%. That still looks high on an absolute basis but it has fallen nearly 382 basis points from a high of 16.23% in the month of June 2022. In August 2022, the WPI inflation basically emanated from rise in prices of mineral oils, food articles, crude petroleum, natural gas, basic metals, chemicals, electricity and food products. Inside the WPI basket, the big area of concern would be the food articles inflation spiking to 12.37% in August 2022, which is nearly 160 bps higher on yoy basis.

Even as energy inflation sobered in the WPI basket, there are several items that spiked in August 2022. For instance, vegetable prices rose 22.29% in August while the prices of potatoes spiked to 43.56% yoy. Even prices of fruits rallied by 31.75% while the price of protein rich foods like eggs, meat and fish prices rose 7.88%. Due to the impact of the weak Kharif output this year, even cereals prices rose by 11.77% in August 2022. To sum it up, it looks like the WPI of the food basket is really putting the pressure on WPI inflation.

Will this impress the RBI? Not exactly and this is not likely to change the hawkish stance adopted by the RBI. The risk of rising CPI inflation and forex outflows is still there. RBI would be currently focussed on keeping interest rate differential between India and the US wide enough so that there is no run on debt by FPIs. Fed looks all set to raise rates by another 75 bps on 21st September, in which case, the RBI is also likely to follow suit with minimum another 50 bps rate hike. That could change the terminal repo rate closer to 6.5%.