WPI inflation is expected to rise in the next three months and is likely to average around 4.4 percent in 2017, much higher than 2 percent in 2016, says a Nomura report.
India's WPI inflation rose to a 30-month high of 5.2 percent in January from 3.4 percent in December. WPI inflation, which reflects the annual rate of price rise, has risen for the second straight month, notwithstanding the cash crunch following demonetisation.
"The (WPI) acceleration was entirely supply-push led by higher commodity prices rather than demand-pull; but it also suggests rising pressure on profit margins," Nomura India chief economist Sonal Varma said in the note.
The report said there was no sign of demand-driven inflation, as prices of manufactured products such as wood, leather, non-metallic mineral products, machinery & machine tools and transport equipment fell month-on-month in January.
Given weak domestic demand following the demonetisation, demand-side pressures are unlikely to emerge in the immediate future. However, increase in commodity prices and its lagged effect on WPI, suggests WPI inflation will see an uptrend.
"...WPI inflation will rise in the next three months before the inflation rate tapers off," the report said, adding that "we expect WPI inflation to average a much higher 4.4 percent y-o-y in 2017 versus the 2 percent average in 2016".
Moreover, CPI inflation is also likely to start rising for reasons like higher food inflation (due to the ongoing remonetisation and higher minimum support prices) and steady core inflation (due to rising rural wages).
On the policy front, Nomura expects the RBI to stay on hold throughout 2017.
The Reserve Bank in its policy review meet on February 8 kept key interest rate unchanged at 6.25 percent and said that it is awaiting more clarity on inflation trend and impact of demonetisation on growth.
The next meeting of the MPC is scheduled on April 5 and 6, 2017.
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