New Delhi: Wholesale price inflation in March stood at 9.90%, after a 9.89% gain in February, increasing pressure on the Reserve Bank of India (RBI) to raise policy rates in its annual monetary policy review next week.
The provisional inflation rate, released by the department of industrial policy and promotion on Thursday, was less than what analysts expected. The median estimate by a Bloomberg survey of 20 economists projected it at 10.37% and a Reuters poll had forecast headline inflation at 10.39%.
The rate could actually be above 10% when the revised data is released in two months. For January, the number has been revised to 9.4% from the provisional figure of 8.6%.
According to provisional data, wholesale price inflation averaged 3.8% in the fiscal ended 31 March compared with 8.4% in the preceding fiscal.
Analysts, however, said inflation may now decline.
“There is not much left on the upside,” said D.K. Joshi, principal economist at credit rating agency Crisil, qualifying his statement by adding that a drop would depend upon adequate monsoon and no significant rise in global commodity prices.
Graphic: Ahmed Raza Khan/Mint
Pronab Sen, India’s chief statistician, said he expected inflation to peak in March and then fall.
“Food prices are coming down,” he said. “But one has to look at the manufactured price inflation a little more carefully. While food price inflation may settle at around 6-7%, inflation of manufactured items has to remain sub 4% to keep the overall inflation within the comfort zone of 5%.”
Food inflation came down marginally to 16.65% in March from 17.80% a month ago. Inflation for manufactured products also dropped to 7.13% from 7.4% in February, mainly due to declining sugar prices. However, fuel price inflation accelerated to 12.71% from 10.19% a month ago, due to the recent hike in petrol and diesel prices.
Inflation data released on Thursday for the week ended 3 April also indicated food inflation subsided to 17.22% from 17.70% in the previous week.
Nikhilesh Bhattacharyya, associate economist at Moody’s Analytics, said in a research note that since February, inflation pressures have begun to moderate, assisted by favourable agricultural conditions, a belated policy response and a strengthening rupee.
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“A slower pace of appreciation in commodity prices coupled with ample excess capacity globally will help to moderate non-food inflation over the coming quarters,” Bhattacharyya wrote.
High inflation makes a rate hike by RBI almost certain because factory output has been growing at above 10% for five straight months and RBI is apprehensive that rising food prices may spill over to manufactured items.
The central bank raised the repo and reverse repo rates—at which it lends and borrows overnight money from banks—by 25 basis points to 5% and 3.5%, respectively, on 19 March, a month ahead of the annual monetary policy review. One basis point is one hundredth of a percentage point.
Joshi expects RBI to hike the repo rate by 25-50 basis points and the cash reserve ratio (CRR), or the portion of deposits that banks need to keep with the central bank, by 50 basis points. “Interest rates are very low right now and they need to move back to the normal level,” he said.
Rajeev Malik, head, India and Asean economics, Macquarie Capital Securities (Singapore) Pte Ltd, said in a statement that RBI most likely will raise the repo rate by 25 basis points and CRR by 25-50 basis points.
Bhattacharyya said that in the coming quarters RBI was likely to gradually tighten monetary policy, resisting pressure to take measures that will aggressively raise bank rates. “RBI does not want to encourage lenders to tap non-bank and foreign sources over which the RBI has little control,” he said.
He also cautioned that with inflation largely due to supply-side factors beyond a central bank’s control, higher policy rates will have little impact. “Instead, the RBI has been able to dampen inflation pressures via its exchange rate policy, accepting a stronger rupee in recent months,” said Bhattacharyya. “Along with currency appreciation, easing supply constraints are helping reduce inflation pressures.”
The bond market did not react much to the latest inflation data. Yields reached 8.12% shortly before the numbers were released but fell when the inflation rate was lower than market expectations. The benchmark 10-year bond closed at 8.07% against Wednesday’s close of 8.08%.
Dealers said that high inflation numbers are not much of a scare now, as the yields have factored them in. The worry rather is on the massive supply of bonds.
“Fundamental and technicals should govern the movement of yields in the bond market,” said Joydeep Sen, senior vice-president at BNP Paribas Wealth Management. “But now the government supply is breathing over the shoulder of any other factors.”
Anup Roy contributed to this story.