New Delhi: Prices of manufactured products continue to rise, and could, analysts say, make the job of the central bank tougher as it strives to achieve a balance between growth and inflation by regulating interest rates.
Inflation—as measured by the Wholesale Price Index (WPI)—was 10.16% in May, beating the 9.6% and 9.56% median forecasts of economists polled by Bloomberg and Reuters, respectively. The actual number is likely to be much higher because this data is provisional. For instance, WPI for March was revised upwards to 11.04% from the provisional estimate of 9.90%.
At a disaggregate level, the data shows that core inflation—as measured by the rise in prices of everything, but fuel and food products—continues to rise. According to calculations by Nomura Financial Advisory and Securities (India) Pvt. Ltd, core inflation in May rose to 6.58% from the previous month’s 6.05%. Core inflation in December was 0.80%.
“Where it will go, I don’t know,” said chief economic adviser Kaushik Basu, referring to the trend in core inflation. Basu, who described core inflation as “inflation of inflation”, said the government was worried about its upward movement. He, however, stuck to the finance ministry’s forecast that overall WPI would be less than 5% by the end of the current fiscal.
The Reserve Bank of India (RBI) in April had forecast inflation would be 5.5% by the end of the current fiscal.
Rising food prices, which were the main drivers of inflation till a few months ago, have virtually stabilized, Basu said at conference. The drivers of the current bout of inflation are manufactured products such as iron and steel, he added.
The firm trend in prices of manufactured products could be a symptom of a return of pricing power to companies.
“Past input cost pressures are now being passed on to consumers with a lag as domestic demand has rebounded strongly,” Sonal Varma and Ketaki Sharma of Nomura said in their report.
The finance ministry is worried about global developments too. “There is a bit of international commodity concern,” Basu said.
Escalating core inflation has enhanced the relative importance of monetary policy as the central bank tries to manage the fallout of rising demand.
Most economists expect RBI to continue with the current policy of nudging up interest rates in its next quarterly review in July. However, the latest data on inflation when juxtaposed with strong growth in manufacturing output and risks in the external sector on account of Europe’s economic woes make RBI’s job that much more challenging.
Credit rating agency Fitch Inc. on Monday enhanced the outlook on India’s domestic currency rating to stable from negative. However, the agency cautioned that inflation could undo recent gains of fiscal consolidation.
“Inflation remains uncomfortably high, with wholesale prices up 10.2% in the year to May, prompting the central bank to hike rates twice in response so far in 2010,” Fitch’s media release said. “An intensified inflation shock that is severe enough to disrupt macroeconomic and/or financial stability would be negative for India’s ratings.”
Anecdotal evidence from industry lobby groups suggests that the factories of most member companies are running at close to capacity.
“The manufacturing sector, given its recent growth performance, is facing supply constraint as this is evident from the rise in prices of certain basic raw materials and industrial inputs,” Amit Mitra, secretary general of industry lobby Federation of Indian Chambers of Commerce and Industry, said in media statement.
Separately, Planning Commission deputy chairman Montek Singh Ahluwalia said he agreed with the suggestion of Prime Minister’s economic advisory council chairman C. Rangarajan that rising inflation and not robust industrial output should guide RBI.
PTI contributed to this story.