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."
Economictimes.com
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."
Gaurav Kapur, Senior Economist, ABN AMRO Bank, Mumbai: "The impact of fiscal and monetary measures seem to have not worked through just yet. Inflation could ease over the next few weeks, as the impact of these measures takes hold. That said, risks still pretty much remain on the upside for inflation, especially considering that no relief seems to be in sight from the spiralling international commodity prices."
D K Joshi, Principal Economist, Ratings Agency Crisil: "The pressure is not going to ease soon because of the base effect, and the measures taken by the government and the central bank will also take some time to percolate into the economy."
Sonal Varma, Economist, Lehman Brothers, Mumbai: "There has been some acceleration in prices again this week. We still have to wait for the fiscal, monetary and supply side measures, along with good monsoons, to have an effect on prices. Till then, WPI inflation is likely to remain around these levels in the coming weeks. "We do not expect any more repo or reverse repo rate hikes this year, but there is scope for at least another 50 basis point hike in CRR in 2008."
N R Bhanumurthy, Economist, Institute of Economic Growth, New Delhi: "It will take some more time for the steps taken by the government to take effect and it will take even longer for the Reserve of Bank of India policies to dampen inflation. In the immediate future, I don't see inflation coming down below 7.0 percent because this is being driven by the supply side and the impact of the government's policies will be felt only after one or two months. "I expect the central bank's stance to be hawkish on inflation."
MARKET REACTION:
The yield on the 10-year federal bond was at 7.89 percent, steady from before the data. The Indian rupee was at 40.64/65 per dollar, slightly weaker than 40.63/64 beforehand.
BACKGROUND:
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.
▪ 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.
▪ The RBI kept its key lending rate steady at 7.75 percent and left the reverse repo rate, the rate at which it absorbs excess cash from banks, unchanged at 6.0 percent.
▪ 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.
▪ 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.
▪ 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.
Economictimes.com
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