Inflation quickens to five-month high; RBI stance vindicated

Inflation quickens to five-month high; RBI stance vindicated
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First Published: Sat, Feb 02 2008. 12 28 AM IST

Updated: Sat, Feb 02 2008. 12 28 AM IST
New Delhi: Inflation unexpectedly accelerated to a five-month high, vindicating the Reserve Bank of India’s (RBI) decision this week to refrain from cutting interest rates.
Wholesale prices rose 3.93% in the week ended 19 January from a year earlier, faster than the previous week’s 3.83%, the ministry of commerce and industry said on Friday.
Analysts had forecast inflation at 3.82%.
Big picture: Union finance minister P. Chidambaram said the country’s policies need to constantly keep in step with the international situation. (Photo: Madhu Kapparath/Mint)
Inflation may quicken further as Prime Minister Manmohan Singh prepares to raise fuel prices next week for the first time in more than 18 months. Concerns about rising prices prompted RBI to keep its benchmark interest rate unchanged near a six-year high this week.
Higher oil and food costs “pose the risk of aggravating inflation risks,” the central bank said in its monetary policy statement on 29 January. Inflation is “suppressed” as it doesn’t take into account last year’s surge in crude oil prices.
Bonds pared gains after the inflation report. The price of the 7.99% note due July 2017 traded at 103.28, down from 103.4 earlier. The security closed at 103.26 on Friday.
The Union cabinet may consider raising petrol and diesel prices next week to reduce losses at state-run refineries, petroleum and natural gas minister Murli Deora said on Thursday.
The government hasn’t allowed increases in petrol and diesel costs since June 2006 to protect consumers and curb inflation even as crude oil prices rose 57% last year and reached a record $100.09 (Rs3,943) a barrel on 3 January. The government’s price controls have helped curb inflation, which reached a more than two-year high of 6.69% in January.
RBI in its 29 January monetary policy announcement left the repurchase rate unchanged at 7.75%, maintained the reverse repurchase rate at 6%, and held its cash reserve ratio at 7.5%.
“The message of the monetary policy is that curbing inflation remains the highest priority for the Reserve Bank,” said Prasanna Ananthasubramaniam, a fixed-income analyst at ICICI Securities Ltd. “We expect cut in rates between April and July, depending upon how the global situation pans out.”
RBI may come under pressure after the US Federal Reserve cut the benchmark interest rate by half a percentage point to 3% on 30 January, the second cut in nine days, to avert a recession in the world’s largest economy.
“We are in a period of considerable global uncertainties,” Union finance minister Palaniappan Chidambaram said on Thursday.
“We have to constantly bear in mind that our policies have to be adjusted rapidly depending upon the evolving international situation,” he added.
The US Fed rate cut may push capital inflows and fuel inflation in India, Asia’s third largest economy. “It’s too early to say” what impact the Fed rate cut will have on the Indian economy and it would better to “wait for a day or two,” Chidambaram had said.
The government on Friday revised the inflation rate for the week ended 24 November to 3.11% from 3.01%. It revises the inflation rate after a delay of two months on additional price data.
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First Published: Sat, Feb 02 2008. 12 28 AM IST