Inflation may top 10% by end of March, says Pronab Sen

Inflation may top 10% by end of March, says Pronab Sen

New Delhi: India’s headline inflation may exceed 10% by end-March and the Reserve Bank of India (RBI) could tighten monetary policy even earlier than an April policy review, a government official said on Tuesday.

The monthly wholesale price index touched a 14-month high of 8.56% in January, leaping over the central bank’s end-March target of 8.5%.

“As far as monetary action is concerned, the real worry is non-food inflation and that has now gone up above 5%," chief statistician of India Pronab Sen told Reuters.

In January, the RBI had raised the wholesale price inflation forecast for the current financial year ending in March to 8.5% from 6.5%.

Asked if WPI inflation could top 10% by end-March, Sen said: “It could but that will depend what happens to food prices in the next couple of weeks."

On whether the central bank might have to raise rates before April, Sen said: “I think the RBI will have to look at it ... The RBI can do it anytime".

India’s federal bond yields rose 1 basis point after the comments before trading was halted due to a technical glitch.

“Yields rose a bit post the comments, but then trading halted," said Piyush Wadhwa, senior vice-president at ICICI securities primary dealership.

“Not much further upside is expected in yields immediately, but the 10-year could rise to around 8.25% levels in the first quarter of the next financial year."

The yield on the 10-year bond had fallen to 7.83% in early deals on Tuesday. It had ended at 7.88% on Monday after rising to 7.97%, its highest since 15 October 2008.

India’s food articles index rose an annual 17.43% in January, near an 11-year high. The manufacturing inflation was up at 6.55% in January, in a sign that food inflation was impacting other sectors.

Monetary Action

Many analysts expect the central bank to take some monetary action at its next policy review in April as industrial output growth also picked up pace, growing 16.8% in December from a year earlier.

RBI deputy governor Subir Gokarn said last week that no monetary action was expected before April unless there was a completely unanticipated or unwarranted event.

Sen said any hike in petrol and diesel prices, as recommended by a government panel on fuel pricing, would have more impact on the consumer price index than on wholesale price inflation.

“Since the economic recovery is still not broad-based, the central bank may have to wait till April before announcing any monetary action," said Rupa Rege Nitsure, chief economist at Bank of Baroda said.

“I expect a 50-basis point increase in the cash reserve ratio and a 25-basis point increase in repo and reverse repo but only in April, expecting credit growth will pick up by then," she said.

Fiscal Stimulus Withdrawal

Sen said that although industrial production grew at a higher-than-expected 16.8% in December from a year ago, the government should wait for further consolidation of economic recovery before withdrawing fiscal stimulus measures.

“I still think they (the government) should wait a little," he said when asked whether there was a case for fiscal stimulus withdrawal in the Union budget.

Finance minister Pranab Mukherjee will present the annual budget on 26 February.

Analysts said Mukherjee could announce the rollback of stimulus by raising factory gate duties by 2-4% and service tax by 2%.

India has provided fiscal stimulus measures worth around Rs1.86 trillion ($40 billion) and further additional spending of about $4 billion since December 2008.