Notwithstanding the slight decline in WPI inflation in October, inflationary pressures are likely to continue in the months ahead and may touch 8.2% by the year end, says a report. According to a research note by Morgan Stanley, WPI inflation is likely to accelerate to around 8-8.2% by December 2012 before moderating to the 7-7.5-percent level by the quarter ended March 2013.
Though the provisional WPI inflation for October has decelerated to 7.45 percent, but going by the trend of revision in the past months, the final number could be closer to 8 percent, Morgan Stanley said.
WPI Inflation declined marginally to 7.45 percent in October, from 7.81 percent in September. WPI inflation has remained above the RBI’s comfort zone of 5-5.5 percent for the past 35 months now.
Moreover, the moderation in the price rise comes amid a string of bad data including the contraction in industrial output, and decline in exports along with rise in retail inflation, dampening hopes of an early economic revival.
“Given the central bank’s guidance for monetary policy stance in its last monetary policy review on October 30, we believe that policy rates will remain on hold until the end of 2012, with easing to start in Q1-2013,” the research note said.
Though inflation rates are likely to show some moderation in the fourth quarter of this fiscal year, but it is still expected to be way ahead of the Reserve Bank’s comfort zone and thus the RBI would have limited room for policy easing.
“We believe that even as inflation starts to ease from Q1-2013, it may remain above the RBIs comfort zone for longer. Hence, we expect policy easing to be limited to about 50-75bps in 2013,” Morgan Stanley said.
According to the report, at a time when macro stability indicators remain challenging, monetary policy easing is a less effective tool to revive growth. “We believe that policy reforms that help to correct the bad growth mix issue will be key to reviving growth.” it said.
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