Wholesale prices rise, pose dilemma for policymakers

Wholesale prices rise, pose dilemma for policymakers
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First Published: Thu, Sep 24 2009. 10 38 PM IST

 Graphics: Paras Jain / Mint
Graphics: Paras Jain / Mint
Updated: Thu, Sep 24 2009. 10 38 PM IST
New Delhi: Wholesale prices rose for a second week, after 13 previous drops, posing a challenge to policymakers who want to boost growth without fanning inflation.
Graphics: Paras Jain / Mint
The benchmark Wholesale Price Index (WPI) climbed 0.37% in the week to 12 September from a year earlier, after rising 0.125% in the previous week, the commerce ministry said on Thursday. Economists had expected a 0.295% gain.
Finance minister Pranab Mukherjee had said last week that a dear money policy was unacceptable and Reserve Bank of India (RBI) governor D. Subbarao had indicated that the central bank would only raise interest rates when it was sure a recovery was under way. The bank’s next monetary policy statement is due late next month.
“We still consider it unlikely that the RBI will shift from its accommodative stance in its October credit policy review,” said Rahul Bajoria, an economist at Barclays Capital in Singapore. The central bank will probably start to raise borrowing costs at or before its January meeting, he added.
Barclays now sees potential upside risks to its forecast that WPI will reach 6% by the end of 2009 and quicken to 7% by March next year, said Bajoria.
Inflation is expected by economists to accelerate in the coming months as the driest monsoon since 2002 curbs production of rice, sugar cane, oil seeds and vegetables and threatens to cause shortages. India’s monsoon rains were 21%?less than average as of 16 September, the weather bureau said last week.
“Poor monsoon season rainfall has worsened the already elevated pace of increase in food prices,” said Rajeev Malik, an economist with Macquarie Group Ltd in Singapore, who expects the benchmark inflation rate to climb to as high as 7.5% by March next year. “However, the solution is not a premature hiking of policy rates.”
Subbarao cut interest rates six times from October 2008 to April to shield India’s $1.2 trillion (Rs57.7 trillion) economy from the worst global recession since the Great Depression. In the last monetary policy announcement on 28 July, he left the reverse repurchase rate unchanged at 3.25% and kept the repurchase rate at 4.755.
Subbarao on 15 September described the need to balance boosting growth against checking inflation as a challenge. Subbarao, who predicts Asia’s third largest economy may be among the first to increase borrowing costs, said last week the central bank was in no rush to raise interest rates.
India’s economy is expected by RBI to expand 6% in the fiscal year to March, slower than the 8.7% average annual growth in the last four years.
Finance ministers from the Group of Twenty (G-20) nations earlier this month underlined the need to continue with record low interest rates and at least $2 trillion in fiscal stimulus on nascent signs of recovery. They also agreed the eventual exit from emergency measures should be coordinated across borders to avoid distorting markets. G-20 leaders meet in Pittsburgh on Thursday.
The WPI published on Thursday may be revised in two months, after the government receives additional data. The ministry revised the rate for the week ended 18 July to a drop of 0.545% from a decline of 1.54%.
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First Published: Thu, Sep 24 2009. 10 38 PM IST