Low base may push up inflation

High global energy and food prices are fuelling inflationary expectations in India.

The wholesale price index (WPI) inflation is likely to increase in the coming weeks as the high base effect, which has so far been partly responsible for keeping it at moderate level, is fading.

The wholesale price index increased to 3.11 per cent for the week ended November 3, against the previous week's level of 2.97 per cent.

For the week ended November 3, 2006, the WPI stood at 209.1. For three weeks after that, it hovered around the same level, after which it steadily declined till the middle of February 2007, when it touched 208.6.

Along with the impact of monetary and fiscal steps by the RBI and the government, a higher base has led to inflation remaining under control.

Analysts say a lower base effect, high liquidity and a looming hike in petroleum prices will push inflation up in the coming weeks. "So far, the base effect and lower fuel prices have kept inflation low. As the cost of subsidies is rising, the government will be forced to partly pass on the cost of rising fuel prices to consumers. Besides, high liquidity will drive the rate of inflation to 5 per cent by March," said DK Joshi, principal economist, Crisil.

"I do not see substantial moderation in food prices despite a good monsoon as globally also food prices have remained high," Joshi added.

"If wholesale prices remain at the present level and the government does not hike fuel prices, inflation will go up marginally. However, it will be within the RBI's comfort level," said Arun Kaul, GM (treasury), Punjab National Bank.

The RBI, in its recent mid-term monetary policy review, said it would try to condition inflation expectations in the 4-4.5 per cent range, with the medium term target being around 3 per cent.

According to analysts, high global energy and food prices are fuelling inflationary expectations in India. This implies that chances of softening of policy rates are slim, which the central bank also indicated in the review.

However, some analysts say this is not the beginning of an upward trend. "It would be too premature to say so. I think this is a temporary deviation and does not require any policy response. I believe inflation will remain in the 3-3.25 per cent range in the coming weeks," said Abheek Barua, chief economist, HDFC Bank.