Inflation rears its head again

The annual rate of inflation rose to 6.10 per cent for the week ended February 24, 2007, compared with 6.05 per cent for the previous week. The rise in inflation after a two-week slowdown, is on account of higher prices of cement, fish-marine products, ragi, arhar and tyre cord fabric.

The annual rate of inflation was 4.18 per cent on February 25, 2006.

The inflation data came a day after Prime Minister Manmohan Singh expressed relief in Parliament that the inflation rate had declined in the last two weeks. Finance Minister P Chidambaram had, on February 8, said rising inflation was more a social problem than a political or an economic one.

"The market was expecting an inflation rate of 6 per cent to 6.10 per cent. The high inflation figure is due to the low base year effect. It will take couple of weeks to moderate," said Arun Kaul, general manager (treasury and finance), Punjab National Bank.

The prices of gram, fruit and vegetables, condiments and spices, and urad declined marginally. However, prices of niger seed, groundnut seed, castor seed and linseed rose.

The index of manufactured products rose by 0.4 per cent, from 181.8 to 182.5, for the previous week. Cement prices rose by 0.4 per cent. Prices of some capsules other than vitamins and antibiotics became expensive by 24 per cent. The index of the chemicals and chemical products group rose by 1.9 per cent to 197.2. Fuel prices, however, remained at the previous week's level.

According to a Bloomberg survey, India's industrial production grew at more than 10 per cent for three months in a row, the third being January, indicating that the Reserve Bank of India may have to raise interest rates further to dampen consumer demand, which is stoking inflation.

Production at factories, utilities and mines rose 10.1 per cent from a year ago, following December's 11.1 per cent gain, according to the median forecast of 14 economists in the survey. The data are due at noon in New Delhi on March 12.

Companies including Maruti Udyog Ltd and Reliance Industries Ltd are producing more cars and oil products in Asia's fourth-largest economy, as record bank lending and higher salaries spur consumer spending.

Rising demand has pushed inflation to a two-year high and may prompt the Reserve Bank of India (RBI) to increase its key overnight lending rate next month for the second time this year.

"The strength of industrial production suggests that monetary conditions are still easy," said Shashanka Bhide, chief economist at the National Council of Applied Economic Research in New Delhi. "The RBI may raise interest rates again," Bhide said.

India's $854 billion economy would probably expand at a record 9.2 per cent in the year to March 31, following 9 per cent growth in the previous year, the government said on February 7. The economy has grown at an average rate of 8.6 per cent since 2003, the fastest expansion in the country's 60-year independent history.

RBI Governor YV Reddy has raised the bank's overnight lending rate to a four-year high of 7.5 per cent to slow inflation, currently at 6.05 per cent. Manufacturing inflation is at the highest in almost two years.