India’s annual inflation rate remained at 7.8 percent in early May, data showed on Friday, but analysts were more interested in a revision that took the figure above 8 percent in March for the first time in 3-½ years.
The government said it would take more fiscal steps if needed to calm price pressures and an adviser to the prime minister said inflation would ease in the next three to four months, but analysts said an imminent fuel price rise could push it closer to double digits.
Preliminary data for May 10 showed the wholesale price index rose an annual 7.82 percent, close to the previous week’s rise of 7.83 percent and market forecasts.
But the reading for March 15 was revised sharply upwards to 8.02 percent from 6.68 percent, making it the highest inflation rate since September 2004 and fuelling expectations the central bank would take more steps to contain prices. "It just says we are dangerously close to 10 percent," said Shubhada Rao, chief economist at Yes Bank in Mumbai.
Indian inflation figures are frequently revised upwards. But at the end of 2007 revisions were mostly just 0.1 to 0.2 percentage points, in January they had jumped to 0.5 percentage points and in early March data they hit 1.86 percentage points.
The central bank has not raised interest rates in over a year to avoid slowing the economy too rapidly. Instead it has tightened cash conditions to contain surplus inflation-stoking funds in the system, but surging prices, particularly in food and metals, are making its job difficult.
"Do we live with high inflation or see growth prospects jeopardised in the short and medium term?" Rao said.
The 10-year federal bond yield initially edged up on the data before retreating to its pre-data level of 8.02 percent, while the rupee gained to 42.84/85 per dollar from Thursday’s 42.96/97 close.
FUEL PRICES
Policy makers are debating whether to increase retail fuel prices to stem losses at state-run oil companies, which are selling petrol and diesel below market rates.
Oil prices have surged to record highs above $130 a barrel but the government sets heavily discounted retail prices to help fight inflation and protect the poor.
"With a fuel price hike in the offing, inflation is headed up and we may see inflation hit 8.5 percent by June," said A. Prasanna, am economist at ICICI Securities.
"We expect the central bank to take further liquidity tightening measures to control inflation."
The central bank left its key lending rate at 7.75 percent at a rate review in April but raised its cash reserve ratio, the proportion of funds banks must deposit with it, by 25 basis points to 8.25 percent.
That increase takes effect on Saturday, and many economists expect the central bank to tighten again in coming months.
Economists say there is little the central bank can do to tame rising prices, which stem in part from supply constraints and overseas price increases, although traders say it intervened on the currency market this week to stop the rupee from falling too far against the dollar and inflating import prices.
For its part, the government has curbed some exports, cut a series of import duties and put pressure on cement and steel companies to keep prices down.
"Please be patient. We are watching the situation carefully. More steps will be taken as and when needed," Finance Minister Palaniappan Chidambaram told reporters.
C. Rangarajan, chairman of the prime minister’s economic advisory council, said inflation would remain high for another three to four months but good rains in the June-September monsoon season, as well as grain purchases, would help dampen pressures.
"It may reach even 5.5 percent by the end of the fiscal year," Rangarajan said, referring to the year-end in March 2009.
The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it covers a higher number of products and is published weekly.
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