NEW DELHI: Indian inflation jumped to a fresh 3-½ year high in mid-
April, and analysts said it is unlikely to ease soon as price
pressures persist and fiscal and monetary steps will take time to have
an impact.
Data released by the government on Friday showed the wholesale price
index rose 7.57 percent in the 12 months to April 19, above the
previous week's 7.33 percent and outstripping market expectations of
an annual rise of 7.38 percent.
The government and central bank have rolled out a string of policy
changes in recent weeks as inflation has soared.
In the latest move, the Reserve Bank of India on Tuesday raised the
cash reserve ratio (CRR) by 25 basis points to 8.25 percent, its
highest level in seven years, and said it was ready to act again if
price pressures continued to build.
Wholesale inflation now stands at its highest since November 13, 2004,
when it was 7.68 percent. The latest rise was largely driven by higher
prices of foods, metal products, and industrial fuels.
Economists expect the central bank to focus on draining inflation-
fuelling cash from the system, while the government moves to fix
supply-side problems.
"Across the board price pressures are there. We are yet to see the
impact of monetary and fiscal measures," said Shubhada Rao, chief
economist at Yes Bank in Mumbai. "These pressures would continue. The
RBI will continue to focus on liquidity management as a monetary
policy approach."
Speaking to reporters in the southern city of Bangalore, Finance
Minister Palaniappan Chidambaram said inflation would be contained but
people would have to be patient.
The markets remained cool to the data with the yield on the 10-year
federal bond steady at 7.89 percent, while the rupee was at 40.64/65
per dollar, slightly weaker than 40.63/64 beforehand.
The Congress Party-led coalition, under pressure from its allies, also
unveiled new measures on Tuesday to tame inflation and guard food
supplies, slapping export taxes on basmati rice and some steel
products. Policy planners the world over are grappling with soaring
food and raw material prices.
But India, which has about 260 million poor, is especially sensitive
to rising prices as food accounts for a much higher proportion of
people's expenditure than in developed economies.
Fighting inflation has become a top priority for the government as it
heads towards a general election due by May 2009 and a series of key
state polls this year.
COMMENTARY
Shubhada Rao, Chief Economist, Yes Bank, Mumbai: "Across the board,
price pressures are there. We are yet to see the impact of monetary
and fiscal measures. Year ahead, these pressures would continue and
5.5 percent will be a challenge. The RBI will continue to focus on
liquidity management as a monetary policy approach."
India's central bank raised the cash reserve ratio on Tuesday by 25
basis points to 8.25 percent, its highest level in seven years, to
control inflation-stoking cash in the system. The rise will take
effect from May 24.
â–ª The unexpected increase in the CRR, the amount of funds banks have
to keep on deposit with the central bank, followed a two-stage rise
announced earlier in April to 8.0 percent.
â–ª The RBI kept its key lending rate
percent and left the reverse repo rate, the rate at which it absorbs
excess cash from banks, unchanged at 6.0 percent.
â–ª It forecast economic growth of 8.0 to 8.5 percent in the fiscal year
that began last month, after an estimated 8.7 percent in 2007/08. The
bank said it aimed to lower inflation to "around 5.5 percent" this
fiscal year but with the goal of lowering it close to 5.0 percent as
soon as possible.
â–ª The government slapped export taxes on basmati rice and some steel
products and cut more duties on Tuesday as the finance minister
unveiled a series of new moves to boost supplies of key commodities
and help moderate inflation.
â–ª The wholesale price index is more closely watched than the consumer
price index (CPI) because it has a higher number of products in its
basket and is published weekly.
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