Inflation at 10-month high, dampens rate-cut hopes

Headline inflation jumped to a 10-month high in September following a Rs 5 hike in diesel prices by the government, leaving little room for the central bank to heed calls from industry to cut key rates.

Wholesale price index (WPI) based inflation rose to 7.81 per cent in September led by a rise in prices of cereals, wheat, fuel and manufactured products, official data released on Monday showed. Though headline inflation in September was only marginally higher than the 7.55 per cent in August, it is the highest since November 2011 when it touched 9.46 per cent.

"It is not only fuel but even core inflation as can be seen in manufacturing products that has risen sharply. Headline inflation is likely to rise in the coming months as there will be a surge in demand during festival season. Further, the fuel price hike will be transferred into prices of non-fuel commodities," said NR Bhanumurthy, a professor at National Institute of Public Finance and Policy.

Retail or consumer price index-based inflation stood at 9.73 per cent in September, partially lower than 10.03 per cent in August. Analysts had however warned that the CPI inflation data for September did not capture the full impact of the fuel price hike.

"We expect food and overall inflation to inch higher in the coming quarter due to the second-round effects of higher diesel prices," Nomura said in a report. The government on September 13 kicked off long-pending reforms including a Rs 5 hike in diesel and capping the number of subsidised cooking gas cylinders to six a year to step up flagging growth and cut down its spending bill. Last week, the Cabinet hiked urea prices. "You can't say that the economy is overheated. Inflation is above the comfort level ... but it is a lot better than last year. I think the government has taken a number of steps which give us more fiscal room than we had before," said Planning Commission deputy chairman Montek Singh Ahluwalia.

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