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Inflation accelerates in March; rate hike seen

Inflation accelerates in March; rate hike seen
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First Published: Sat, Apr 16 2011. 12 59 AM IST
Updated: Sat, Apr 16 2011. 12 59 AM IST
New Delhi: India’s headline inflation based on the wholesale price index (WPI) unexpectedly accelerated to 8.98% in March from 8.31% a month ago mainly due to rise in prices of manufactured items.
Also See | Inflation Casts Shadow on Growth (PDF)
While food inflation declined to 9.47% in March from 10.65% a month ago, inflation of manufactured items and fuel group rose to 6.21% and 12.92% respectively from 4.91% and 11.49% in February.
While the fuel group inflation rose due to higher prices of coking and non-coking coal, aviation turbine fuel and lignite, inflation of manufactured group increased because of textile, chemicals, metal, plastic and tobacco products.
The Department of Industrial Policy and Promotion which released the data also revised the inflation for January to 9.35% from the provisional figure of 8.23% released earlier.
The March reading was above the Reserve Bank of India’s inflation projection of 8% for the final month of the fiscal year, suggesting its eight interest rate hikes since March 2010 have been insufficient to contain stubbornly high inflation.
“It seems that inflation trajectory has changed. The expected decline in inflation is just not happening and looks like we have underestimated the underlying pressure on prices,” said Ashutosh Datar, an economist at IIFL in Mumbai.
“More monetary tightening is inevitable after today’s data and the case for a 50 basis point hike in May is strengthened,” he said.
The 10-year bond yield rose 7 basis points from early levels to 8% after the data, while the 1-year swap rate climbed 8 basis points to 7.62%. The 5-year swap rate moved up 11 basis points to 8.21%.
The 30-share BSE index extended its fall to 1.6% from 1% before the data. The partially convertible rupee weakened marginally to 44.53 per dollar from 44.51 just before the data.
Manufacturing inflation quickened to 6.21% in March, compared with 4.94% recorded in the prior month.
Central banks across Asia are grappling with rising inflation, even as high oil prices threaten to slow global economic growth.
Brent crude held steady above $122 a barrel on Friday as fears of supply disruption in the Middle East and Africa supported oil prices.
Singapore tightened monetary policy on Thursday, while South Korea’s central bank revised its 2011 inflation forecast upward on Wednesday, after keeping interest rates steady.
Analysts expect China to raise reserves at banks and hike interest rates to put a lid on consumer prices after the country’s turbo-charged growth eased just a touch in the first quarter, while its inflation jumped to a 32-month high.
In India, manufacturing output, which makes up 80% of industrial production, grew an annual 3.5% during February, compared with 16% a year ago.
Several analysts have cut their India growth forecasts for this fiscal year citing the risks from inflation, especially as rising global oil and commodity prices begin to hit the manufacturing sector.
Graphic by Ahmed Raza Khan/Mint
Reuters also contributed to this story
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First Published: Sat, Apr 16 2011. 12 59 AM IST