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Saturday, February 02, 2013

The Economic Times Messes Up Diesel Price Hike With Inflation
The Economic Times writes:
"Also, the diesel price hikes will mean a constantly increasing inflation which will restrict much of interest rate cuts needed currently to boost economic growth. The food price is another area adding to inflation".
But then in the WPI, Food has 24.31 % weight-age while the Non-food items have 75.69 % Weight-age.
In CPI Food articles have 47.58 % weight-age while Non-food articles have 52.42 % weight-age.
Now we cannot have both (Food and non--Food) when it is WPI which is generally considered by the RBI is taken.........
Now among the Primary Products, Food articles have only 14.34 % weightage. And in the Manufactured Products products section, Food articles have 9.97 % weightage.
It is to be understood that, in the Food items also, the inflation is basically in the Primary Products, i.e. vegetables, pulses, non-vegetarian protein products, cereals etc.
Besides in WPI Fuel & Power has only 14.91 % influence.
Hence, when the rise in price of diesel is only 50--60 paise (or Re.0.50--0.60), how much it will affect the core inflation is anybody's guess. Isn't it?
Also, when the food prices have so less weightage, it will not influence the inflation monster to rise its head too much.
Hence, the inflation due to Food and Fuel price hike will not have too much effect on the core inflation, according to my understanding of inflation dynamics.
Therefore, such Reputed Newspapers like Economic Times should not unnecessarily spread panic in the minds of investors. They should be more careful, in their approach.
AdditionalThe RBI has already given an inflation trajectory, taking the expected rise in the Diesel Price into consideration. Their estimate shows of decreasing WPI in the coming days. If the Inflation moves according to the projections of the RBI, we can have more and more cut in the interest rate in the coming months. Moreover, easing global prices of commodities such as copper and crude oil will offset any impact of the depreciation of the Rupee. However, according to currency experts, INR is expected to strengthen up to Rs.53 per dollar and in a best case scenario, to Rs.51.50 per dollar. A chance of break of Rs.55 level per dollar on the higher side looks remote as FIIs continue to pour in funds and the government of India, had taken measures to boost exports. Foreign inflows will help the rupee strengthen further.

Data Courtesy:
Press Information Bureau,
Government of India,
Ministry of Finance.