Raises expectations of monetary tightening.
Headline inflation, measured by the wholesale price index (WPI), has entered the double-digit zone, raising the possibilities of further monetary tightening by the Reserve Bank of India (RBI).
The numbers released today estimated inflation at 10.16 per cent for May, compared with 1.38 per cent in the year-ago period, driven by higher fuel and primary article prices. In April, inflation was estimated at 9.59 per cent.
The rate for the manufactured category also registered a significant spurt in May, raising concerns of rising core inflation. Core inflation is a measure of inflation excluding food and fuel.
But data also showed the two-digit mark was reached in February itself, with the revised numbers estimating inflation at 10.06 per cent, against 9.89 per cent estimated earlier. For March, the numbers were revised to 11.04 per cent from a provisional estimate of 9.9 per cent. Analysts said the inflation numbers for April and May could also be revised upwards, once more data were available.
“The picture is clear that inflationary pressures are now stronger. March figures are revised upwards. Manufacturing sector inflation is up and is not confined to food. So, some action would be called for by the RBI in terms of policy tightening... Some action on the demand side,” Prime Minister’s Economic Advisory Council Chairman C Rangarajan said.
Finance Minister Pranab Mukherjee told reporters in Patna that inflation was expected to remain in double digits till mid-July, but added he was against any increase in interest rates at the moment, to ensure that growth was not affected.
With industrial production also rising by 17.6 per cent in April, close to the 20-year high, economists are not ruling out the possibility of a rate action from Mint Road before the next monetary policy review in July. Even RBI did not rule out the possibility.
“If the governor feels that there is a need and high inflation is likely to continue, we may take a decision before the policy,” RBI Deputy Governor K C Chakrabarty told a news agency in Patna. However, he said the central bank was not overly worried about inflation at present and expected it to ease this month or the next.
The only factor which could hold back further tightening was the tight liquidity conditions in the market due to bunching of advance tax payments and those related to spectrum for third generation mobile telephony and broadband wireless access. The three payments together would drain around Rs 1,35,000 crore from the system by the middle of next week.
Economists, however, said increase in interest rates was a certainty, with the central bank only going to decide on the timing.
Citi India’s Rohini Malkani and Anushka Shah today said in a note that the repo and reverse repo rates could go up by 25 basis points each over the next three months from 5.25 per cent and 3.75 per cent, respectively. RBI uses the two rates to signal an increase in interest rates.
“RBI is behind the curve and I expect policy rates would be increased before the next review,” added JP Morgan’s India Chief Economist Jahangir Aziz.
Apart from inflation, growth seems to be firmly back on track with Kaushik Basu, the chief economic advisor in the finance ministry, averring at a press conference that the economy would grow at around 8.9 per cent this year.
The strong growth prospects and improved fiscal outlook received a thumbs up from rating agency Fitch, which today revised the outlook on India’s long-term local currency issuer default rating to stable from negative and reaffirmed the rating at BBB-.
While revising the growth forecast to 8.5 per cent from 7 per cent, Andrew Colquhoun, director at Fitch’s Asia-Pacific Sovereigns Group, said in a statement: “India’s strong growth prospects and the one-off positive impact from the telecom auctions underpin Fitch’s forecast that the government debt to GDP ratio will decline, easing the near-term pressure on India’s local currency ratings.”
“However, public finances remain a clear weakness, and downward pressure on the ratings could resume, if India veers too far off the deficit reduction path as outlined by the Thirteenth Finance Commission.”
Basu said India’s fiscal health was better than many economies, especially those in Europe.
“Inflation is high but not atrociously so,” he added, but did not comment on what steps the government or the RBI could take. He also stuck to the government’s projection of 5 per cent inflation at the end of March 2011, saying there was no reason to change that at the moment. “While food inflation has virtually petered out, core inflation has picked up.”
According to the data released by the commerce and industry ministry, the inflation rate for primary articles stood at 16.6 per cent in May, against 6.32 per cent in the year-ago period. For manufactured goods, the inflation rate jumped from 2.18 per cent in May 2009 to 6.41 per cent in May this year. For fuel products, the increase was the sharpest from -6.14 per cent a year ago to 13.05 per cent.
Food inflation at 16.49 per cent showed marginal moderation from 16.87 per cent in April. JP Morgan’s Aziz said core inflation was primarily demand-driven.
“The sharp rise in inflation when global commodities prices have fallen is unusual. The answer lies largely in the lagged adjustment in domestic prices; the rise in domestic metal prices in April was spread across April and May WPI. In addition, past input cost pressures are now being passed on to consumers (with a lag) as domestic demand has rebounded strongly,” said Sonal Varma, Nomura’s chief economist in India.
“Inflation is indeed worrisome as it had become more generalised and given the revisions in previous month’s numbers. It is clear it was being underestimated. The probability of raising policy rates is definitely increasing,” said D K Joshi, principal economist with research and ratings agency Crisil India.
