October inflation at 1.34%

October inflation at 1.34%

New Delhi: India’s annual wholesale inflation accelerated in October from a month earlier on costlier minerals and fuels, and analysts expect monetary tightening from next year as the economy picks up.

On Saturday, the government switched to using monthly inflation data for all commodities with 1993-94 as the base year, from the earlier practice of announcing weekly price movement.

The wholesale price index was up 1.34% in October from a year earlier, compared with 0.5% in September and 11.06% a year ago.

Food prices however declined by 1% from the previous month’s level, while minerals and industrial fuels were each costlier by 3%.

“Inflation is building up from the supply side with a lower summer crop and rise in global fuel prices. Demand side pressures might start showing up from December," said N R Bhanumurthy, economist at National Institute of Public Finance and Policy.

“Going forward, we expect monthly inflation at 7.8% by end of March 2010," he said.

At its policy review last month, the central bank lifted its inflation forecast to 6.5% for the end of 2009-10 fiscal year in March, but left policy rates unchanged.

The Reserve Bank of India (RBI) also laid the groundwork for a rise in interest rates by tightening credit to the commercial property sector and removed some of the emergency liquidity support steps that were extended to protect the economy from the global downturn.

Although the annual change in the WPI is still below 2%, the index has risen 6.13% from the beginning of 2009-10 financial year that started in April.

The consumer price index, which attaches greater weightage to food and essential items, was up 11.72% in September.

India’s industrial output grew 9.1% in September from a year earlier, helped by stimulus and festival demand, and adding to the debate on the timing of exit policy.

Monetary Tightening

The International Monetary Fund has pinpointed India, plus China and Australia, as economies that are recovering rapidly, suggesting growing pressure for authorities to tighten monetary policy ahead of others in the region.

A Reuters poll of 20 analysts following the October policy review found that 9 of them expected an increase in the key repo rate by the end of January, when the RBI holds its next review, while all 20 expected a hike both in the repo and reverse repo rates by the end of April.

Fitch India director Devendra Pant said monetary action would not be effective in containing inflation that is driven by food prices. “The chances of monetary tightening before January are less unless the headline inflation rises significantly and price pressures builds in the manufacturing side," he said.

The driest spell in nearly four decades and floods in parts of the country hurt crops and dampened prospects of a faster recovery, and ministers have reiterated the need to continue with fiscal stimulus measures this year as recovery was still fragile.

Ministers and officials have also said some of the accommodative monetary and fiscal stimuli may be withdrawn from next year as the economy starts growing at 7% or more.

“Monetary tightening will be conditional to robust recovery especially in the industrial output. If there is a strong recovery and inflation is also high, monetary tightening could happen between end of January and April," said Bhanumurthy.

The central bank forecast the economy would expand 6% in 2009-10, below 6.5% predicted by the prime minister’s economic panel. It grew 6.7% last year, slowing sharply from 9% or more between 2005-06 and 2007-08.