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Inflation Ticks Up, RBI May Pause On Rates

08 May, 2009

A third straight rise in India’s annual inflation rate as some price pressures emerge may see the Reserve Bank pause in its rate-cutting cycle, although analysts still expected a negative reading in coming weeks.

The wholesale price index , India’s most widely watched inflation measure, rose 0.70 percent in the 12 months to April 25, led by food and manufactured product prices,

It was above the previous week’s annual rise of 0.57 percent, and a touch above market forecasts for a 0.65 percent rise.

“Inflation will still go into negative territory, maybe as early as end May,” said Sujan Hazra, chief economist at Anand Rathi Securities in Mumbai.

“But week-on-week prices are hardening and this is likely to continue for the next 2-3 months, making it harder for the RBI to cut interest rates in the near term.”

The Reserve Bank of India has said the annual inflation rate could turn negative because of the rapid acceleration in prices this time last year, but has discounted the threat of deflation because consumer prices are still strong.

It has forecast wholesale inflation to be around 4.0 percent by the end of the 2009/10 fiscal year next March.

“It is not a real concern for monetary policy at this stage as inflation expectations have softened considerably,” said Han-Sia Yeo, currency and rates strategist for ANZ Bank in Singapore.

Financial markets were largely cool to the data with the 10-year bond yield edging up one basis point to 6.31 percent and the rupee largely unchanged at 49.25/26 per dollar.

The wholesale price based-inflation rate has fallen sharply since peaking at just under 13 percent in August, but annual consumer price inflation in February was 9.63 percent, as prices of food products remain firm.

Last month, the Reserve Bank of India cut its key rates and again urged commercial banks to follow suit to shore up growth, which has been hit harder than expected by the global downturn.

The Reserve Bank of India expects the economy to expand by about 6 percent in 2009/10, down from 9 percent in the past few years as the global recession impacts key sectors.

A member of India’s Planning Commission, which charts five-year growth plans for the economy, said on Friday he expected growth of 7-7.5 percent in 2009/10.

In the past few weeks a slew of data has pointed to a nascent recovery as stimulus measures and the central bank’s previous rate cuts feed into the broader economy.


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Inflation Ticks Up, RBI May Pause On Rates

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