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GOLDMAN Sachs:
We expect the RBI to hike policy rates by 25 bp in the January 25 policy meeting and by a cumulative 100 bp in calendar year 2011
December WPI inflation came in at 8.4% yoy, higher than the 7.5% yoy in November. This was in line with the
market consensus and our expectation of 8.4% yoy. On a sequential basis, headline inflation ticked up 2.2% mom
s.a., much higher than the 0.5% mom rise in November. The October headline number was revised up to 9.1% yoy
from 8.6% yoy.
Pressure on the core continued to pick up. Core inflation rose 1.0% mom s.a., after a 0.2% mom increase in
November. On a yoy basis, core inflation rose slightly to 7.6% yoy from 7.4% yoy in the previous month. Fuel
prices rose 2.3% mom, as petrol prices were raised in December. Food prices grew substantially by 4.5% mom
s.a. from the 0.5% mom growth in November, mainly due to a rise in the prices of vegetables, particularly onions.
The December WPI numbers suggest that headline inflation and especially core prices remained high.
There are upside risks to our end-FY11 inflation target of 6.5%, which is above the Reserve Bank of India’s (RBI)
forecast of 5.5%. We think the RBI will have to raise its inflation forecast shortly. It is noteworthy that core inflation
has shown significant sequential increases in recent months, suggesting that higher primary articles and fuel prices
continue to seep into core, and that the pressures from demand remain high. Going forward, the trajectory of
inflation will depend on primary articles, although high inflationary expectations and rising commodity prices may
continue to put upward pressure on prices.
We expect the RBI to hike policy rates by 25 bp in the January 25 policy meeting and by a cumulative 100
bp in calendar year 2011.
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