New Delhi: Inflation fell sharply to a three-month low of 5.74% in the last week of 2006-07 from 6.39% in the previous week, as the impact of import duty cuts in various products in February and aggressive monetary tightening by the central bank finally started taking effect.
Analysts, who had forecast higher inflation, expect the Reserve Bank of India to hold on to its current short-term lending rate of 7.75%, at least till 24 April when it is scheduled to announce a new monetary policy for the current year.
D.K. Joshi, principal economist at ratings firm CRISIL, said that “the drop was also because inflation had started rising at the same time last year, reaching a peak around May-June, which means that we can expect inflation to stabilise around 5-5.5% in a couple of months.” Inflation was 3.98% for the week of 1 April 2006 (See Graphic).
In the week ended 31 March, the wholesale price index actually rose by 0.1% to 210 from 209.8 in the week ended 24 March, yet the rate of inflation declined. “The sharpness of the fall partly reflects favourable base effects as well as the temporary impact from the government’s recent fiscal measures,” said HSBC economist Robert Prior-Wandesforde.
The drop was caused by lower prices across the list of commodities tracked by the wholesale price index, especially food, edible oils, cement, man-made fibres and plastics.
Rajeev Malik, an economist with JP Morgan Chase Bank, Singapore, said: “Manufactured goods inflation will remain high. RBI is probably done with increasing policy rates but could still hike the cash reserve ratio.”
Annually, inflation in food prices has slowed to 8.3% and in manufactured products to 5.7%. But it remains high in products where there are still supply pressures, such as edible oils (14.7%), non-metallic mineral products (9%), and basic metals, alloys and products (11%).
Yet, some analysts such as Prior-Wandesforde predict that by the end of 2007, the inflation rate may be below RBI’s tolerance level of 5-5.5%; these analysts expect industrial growth to slow to 9% by end-2007. Joshi agreed, saying that industrial output figures released on Thursday showed that consumer goods output growth was slowing to 7-8%.