The decelerating trend in headline inflation was rudely reversed in December due to rising food prices both on the domestic and global front. Consequently, headline inflation rose 8.43%YoY in Dec, in line with expectations of 8.4% but higher than 7.5% levels seen in Nov.
While the base effect was expected to kick in, the rise in the Dec numbers was primarily due to primary articles which rose 16.5% YoY, 3.5%MoM) Primary food inflation jumped to 13.6% y-o-y (vs. 9.4% in November) led by prices on onions, other vegetables, and fruits as the extended monsoons and cold weather in certain regions have destroyed crops. Abstracting from food, non-food primary inflation stayed high at 22.3% y-o-y (vs. 23.2% y-o-y in November). Prices of minerals also grew at a faster pace (27.7% y-o-y vs. 21.5% in November), while fuel prices were up a tad too, 11.2% y-o-y (vs. 10.3% in November).
A spike in food prices and rising core inflation is making RBI’s job increasingly challenging. Government measures to quell food inflation are not likely to have a large impact. It’s time yet again for the RBI to roll up its sleeves and resume tightening. We expect rate hikes will resume later this month with 25bps and that rates will go up by a cumulative 125 bps in 2011.
Foreign Institutional Investors (FIIs) remained net sellers, divesting US$768 mn in the past five trading secessions.