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Inflation remains above RBI’s target

Inflation remains above RBI’s target
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First Published: Thu, Apr 05 2007. 04 32 PM IST
Updated: Thu, Apr 05 2007. 04 32 PM IST
By Cherian Thomas/Bloomberg
New Delhi: India’s inflation remained above the upper limit of the central bank’s target for a 16th straight week, adding pressure for further increases in borrowing costs to contain prices.
The key wholesale price inflation rate was 6.39% in the week ended 24 March from 6.46% in the previous week, the Ministry of Commerce & Industry said in a report in New Delhi on 5 April. Analysts forecast inflation at 6.25%.
Faster-than-expected gains in prices may make it harder for the Reserve Bank of India to achieve its goal of inflation of between 5% and 5.5% by 31 March. India’s 10-year bonds headed for the biggest weekly decline in almost two months on concern the central bank will continue to tighten the amount of money in the banking system to curb inflation.
“Monetary policy needs to be tightened,” said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc in Singapore. “The accelerated pace of tightening in recent months reflects the central bank’s increasing anxiety about inflation data and recognition that they have fallen behind the curve a bit.”
Reserve Bank governor Yaga Venugopal Reddy on 30 March unexpectedly raised the cash reserve ratio, or the amount of cash lenders must set aside against deposits, for the third time since December and raised the benchmark overnight lending rate for the sixth time in 15 months to a five-year high.
‘Recalcitrant’ Inflation
Inflation has remained “recalcitrant” because bank loans in the past three years have grown at the fastest pace since 1971, which has boosted demand for manufactured and farm products and created shortages, said Saumitra Chaudhuri, chief economist at rating company ICRA Ltd in Gurgaon, India.
India’s benchmark yields climbed to the highest in eight months on 3 April, the first day of trading after the central bank’s action on 30 March. The yield on the 8.07% bond due January 2017 this week rose 15 basis points to 8.15%, according to the central bank’s trading system.
Prime Minister Manmohan Singh wants to tame inflation at the earliest to win voter support in a key state poll this week, after losing two provincial elections in February.
Singh’s Indian National Congress party blamed inflation for state election losses in February. The party faces polls again on 7 April in the northern state of Uttar Pradesh, the country’s most populous. The election will be staggered over a month and will set the tone for general elections in about two years.
Auto Fuels
To slow inflation, the government lowered the price of auto fuels by as much as 4.5% in February, the second cut in 2 1/2 months. Finance Minister Palaniappan Chidambaram also cut tariffs on diesel and other goods in his budget on 28 February. The cuts were the second in five weeks after Chidambaram in January unexpectedly cut duties on products from sulfur to steel.
The government last month asked steelmakers to cut prices and enter into an agreement with cement companies to hold prices for a year to help curb inflation.
The government revised the inflation rate for the week ended 27 January to 6.69% from 6.58%. The government revises the inflation rate after a delay of two months on additional price data.
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First Published: Thu, Apr 05 2007. 04 32 PM IST
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