During August, food items became costlier by 18.8% on year-on-year basis, mainly on 245% increase in onion prices and 77.8% hike in vegetable prices
 

Costlier onion and other vegetables pushed inflation up 6.1% in August for the third month in a row, making it difficult for the Reserve Bank of India (RBI) to cut rates in the monetary policy review due later this week. The inflation stood at 5.79% in July and 8.01% in August 2012.

In a research note, Nomura Financial Advisory and Securities (India) Pvt Ltd, said, "Today’s data show that, even as demand remains weak, supply-side shocks from a weak rupee and higher food prices are pushing wholesale price index (WPI) inflation up. Even as we expect vegetable prices to reverse in coming months, we expect this trend of cost-push inflation to continue to drive WPI inflation higher in the near-term from currency weakness, elevated oil prices and impending fuel price hikes. We do not see demand-driven inflation as a problem in the current environment; instead, supply shocks will likely be the key driver."

During August, food items became costlier by 18.8% on year-on-year basis. The highest increase during the month was witnessed in the case of onion, which reported an increase of 245% year-on-year. Vegetable prices in general rose 77.81%. The high increase in prices was also seen in other essential food items like rice, cereals, egg, meat and fish.

India Ratings & Research, in a note said, although it expects cyclical inflation to subside from September 2013 due to good monsoon, structural factors driving food inflation will continue to exert pressure on inflation. “Moreover, the danger of suppressed inflation due to non-pass through of currency depreciation still persists. Therefore, inflation will increase as companies begin to pass through rising import costs on account of a weak rupee into the domestic market,” the Fitch group company said.

On the positive side, potato prices declined about 15% followed by pulses, which became cheaper by 14% compared to August last year.

In the case of manufactured items, sugar and edible oils became cheaper by 4.2% and 3.86%, respectively. Overall, manufactured items showed a moderate increase of 1.9%.

Raghuram Rajan, the new governor of RBI, who is scheduled to come out with his first credit policy review on 20th September, will have to take into account the rising inflation while announcing steps to boost the sagging growth.

"The key challenge for the RBI is the continued elevated level of food inflation, which is also reflected in high CPI inflation and elevated inflation expectations; these factors reduce the available space to stimulate domestic demand. In its policy meeting on 20th September, we expect the central bank to keep key policy rates (the repo rate and cash reserve ratio -CRR) unchanged, in line with consensus," Nomura said.

Ratings agency CRISIL said, it had highlighted last month that there was an upside risk to inflation from the weak rupee, which is now materialised.  “Accordingly, we have revised upward the average WPI inflation forecast for this fiscal to 6.2% from 5.3%. Core inflation is low right now, but loosening of monetary policy to support growth runs the risk of creating a situation of high-generalised inflation as the supply shocks persist. We expect the RBI to leave interest rates unchanged on September 20 and also for the rest of the year,’ the unit of S&P said.

According to Nomura, the focus on 20th September would be whether the RBI starts to unwind some of its recent liquidity tightening measures, which were aimed at stabilising the currency. "Should rupee remain stable after the 17-18th September Federal Reserve meeting, a calibrated reversal of some of the liquidity tightening measures cannot be ruled out, in our view," it added.