India’s inflation rate was unchanged for the third straight week, staying at near a two-year high, the government said.
The key wholesale price inflation rate remained at 6.46% in the week ended 17 March, the commerce ministry said in a weekly report released here on Friday. Analysts had estimated the inflation rate would be 6.50%.
Inflation may start slowing because of the impact of higher interest rates and reduction in excise duties on fuel, steel and other products, said economist Rajeev Malik, senior economist at JPMorgan Chase Bank in Singapore. Still, record bank lending may sustain demand for cars, houses and consumer goods, fanning prices of manufactured products.
“Inflation is set to fall back,” said Malik. “Manufactured goods inflation will remain elevated. The central bank is probably done with hiking policy rates, but will maintain a tight liquidity stance.”
The inflation data for the week ended 17 March is the first after the Asian Development Bank projected economic growth to shrink to 8% next fiscal, owing to tight monetary policy to contain overheating. The multilateral funding agency had also forecast that inflation would reduce to a tolerable 5% in the next two years.
The Reserve Bank of India (RBI) has raised its key overnight lending rate five times since January 2006 to 7.50% to contain inflation. It will announce its next monetary policy on 24 April. On Thursday, finance minister P. Chidambaram said RBI was the final arbitrator on interest rates. “But given the rising inflation,” he said, “it is a natural inference that there may be tightening of monetary policy.”
Since December, RBI has twice increased the cash reserve ratio, or the proportion of deposits commercial banks need to place with the central bank as reserve, to reduce money available for lending. This month, it resumed the sale of the so-called market stabilization bonds after a gap of almost two years to mop up excess cash from the banking system.
Banks are flush with money as the fastest pace of economic growth in almost two decades lures investors to Indian stocks, sending the rupee to its biggest monthly gain since October 2006. India’s $854 billion (Rs37.6 lakh crore) economy may expand 9.2% in the year ending 31 March, the government estimates. Commercial bank credit has grown at an average 30% in the past three years, boosting demand for manufactured and agricultural products. February’s 4.5% cut in auto fuel prices was an attempt to slow inflation, and was the second cut in two and a half months. Chidambaram also cut tariffs on diesel and other goods in his Budget.
The government this month asked steel makers to cut prices and entered into an agreement with cement companies to hold prices for a year to help curb inflation. The government also revised the inflation rate for the week ended 20 January to 6.31% from 6.11%. The government revised the inflation rate after a delay of two months on additional price data.
PTI contributed to this story.