New Delhi: India’s inflation eased in April even as revised data showed wholesale price inflation has already crossed the double-digit mark in February.
The decelerating price data along with moderating factory output may ease the pressure on the central bank to immediately raise policy rates at a time when the impact of the emerging crisis in Europe is yet unknown. However, economists say the Reserve Bank of India (RBI) may continue raising interest rates in a slow and calibrated manner.
Graphic: Ahmed Raza Khan/Mint
Provisional data released by the department of industrial policy and promotion showed that in April, inflation stood at 9.59% while data for February was revised to 10.06%.
While inflation for manufactured items surprisingly declined in April due to a fall in the prices of sugar and edible oil, food inflation rose on the back of higher prices of pulses, milk, condiments and spices.
Chief economic adviser in the finance ministry Kaushik Basu said in Kolkata that he expects inflation to ease in the coming months and food inflation to ease gradually. “It is very, very unlikely that inflation will go back to double digits. In June, it might increase slightly due to the base effect,” he said.
Analysts, however, say revised data would show inflation to be in double digits till April. “We expect the revision in March to be steeper as higher mineral prices and sugar cane prices are yet to be taken into account,” said Shubhada Rao, chief economist at Yes Bank Ltd. “While near-term concern over inflation persists, we expect inflation to moderate from July onwards.”
“Going forward, with the base effect likely to come into play, headline WPI is likely to trend to sub-8% levels in June. We are adjusting our full-year average inflation estimate to 7.4% from 8.4%,” economists Rohini Malkani and Anushka Shah of Citigroup India said in a research note.
Abheek Barua, chief economist at HDFC Bank Ltd, said average inflation in 2010-11 will be around 7.2%. “Inflation will dip in May due to a base effect, only to rise again in June. From July onwards, it will moderate till October to the 7.5-8% level.”
However, he said the moderation in inflation will go hand in hand with a rise in core inflation, which would be worrying for RBI. Core inflation excludes commodities such as food and energy, which are prone to volatile movements.
There could also be pressure on inflation from an expected rise in crude oil prices. Reliance Industries Ltd chairman Mukesh Ambani said on Friday that crude oil prices could rise to more than $100 (Rs4,500) a barrel due to sluggish refinery growth and the high cost of new discoveries and production.
“By most analyst accounts, crude oil prices are well above the $70 mark and in the foreseeable future, in the worst case, we have to be prepared to again see a three-digit oil price,” Ambani told a conference in Mumbai. “Eighty dollars to $100 is a norm in this ever-changing global dynamic and we have to reset our thinking rather hoping that oil prices will go back, and energy prices and feedstock prices will go back to what we were used to in the last two decades.”
US crude oil fell to a three-month low below $74 on Friday on concerns the European debt crisis would curb global growth and energy demand, while a stronger dollar shrank buying power for other currency holders.
Economists expect RBI to continue tightening policy rates to arrive at the pre-crisis neutral level of interest rates even as factory output and inflation are set to moderate.
Citigroup’s Malkani and Shah said a moderation in industrial production as well as inflation due to the base effect have already been factored in by RBI. “With growth on track and policy rates still at pre-crisis levels, we maintain our call of an additional 75 basis points hike in 2010.” However, they said the problems in Europe raise the odds of RBI taking action only during policy meetings.
However, Yes Bank’s Rao said she does not rule out an inter-meeting rate hike before the scheduled meeting on 27 July.
RBI raised the repo and reverse repo rates—at which it lends and borrows overnight money from banks—by 50 basis points within two months to April. One basis point is one-hundredth of a percentage point.
HDFC Bank’s Barua said the global financial stability arising out of the uncertainty in Europe will impact RBI’s decisions more than growth inflation dynamics. “That is a bigger issue than the moderation in inflation and industrial production at this stage,” he said.
However, N.R. Bhanumurthy, economist with the National Institute of Public Finance and Policy think tank, said RBI may still go ahead with its monetary policy tightening as inflation is way above its comfort zone. “Inflation will smoothen by June or July to the 8-9% level. RBI’s reaction will depend on the medium-term inflation expectation. Even as food price inflation may come down, non-food price inflation will go up, which is a larger concern for the RBI,” he added.
Reuters contributed to this story.