India inflation to rocket to 9%

A nasty combination of high food and core inflation will even push it to close to double-digits by 2Q13.

According to Nomura's Asia Special Report, despite a sharp growth slowdown, India's headline WPI inflation is expected to remain sticky in the 7.5-8.5% range, mainly due to high food inflation. Bad global weather conditions, an increase in domestic food support prices and a shortfall in food output due to below-normal rains are likely to put substantial upside pressure on domestic food prices in coming quarters.

Here's more from Nomura:

Even as demand has weakened, the fall in trend growth means that domestic slack is limited. Moreover, a weak rupee is offsetting the benefits from lower commodity prices.

Under scenario 1, where commodity prices surge, we expect high food inflation to be accompanied by rising input cost pressures, pushing up core inflation. This combination of high food and core inflation will likely push headline inflation above 9% y-o-y by Q4 2012 and close to double-digits by Q2 2013.

By contrast, if global commodity prices collapse as in scenario 2, India would benefit substantially as lower non-food inflation would offset the impact of higher food prices. In this scenario, we judge that headline WPI inflation would fall below 7% y-o-y by Q4 2012 and to around 5% by Q2 2013, as core and primary non-food inflation plunge.