Inflationary pressures to stay, despite fall in April

Inflationary pressures to stay, despite fall in April

New Delhi : Inflation is set to remain a key policy concern despite a softening of prices in April, as the government signalled more fuel price hikes in the coming months.

India’s headline inflation as measured by the Wholesale Price Index (WPI) declined to 8.66% in April from 9% in March as prices of food and manufactured products eased.

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State-owned oil companies increased petrol prices by about 5 a litre effective 14 May, a day after electoral results were announced in five states. Finance minister Pranab Mukherjee said there would be some impact on overall inflation due to “adjustment in the petrol prices effected by the oil marketing companies in the coming months".

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An empowered group of ministers on petroleum pricing headed by Mukherjee is scheduled to meet on 17 May to decide on increasing the prices of liquefied petroleum gas (LPG) and diesel as well.

Mukherjee also cautioned about high international commodity prices. “We will continue to monitor the situation and take necessary measures to address the inflationary pressures in the economy," he said.

Citigroup Inc., in a macro report released before the inflation data was announced on Monday, said it expected the petrol price rise to have a direct impact of 8 basis points, or 0.08 percentage point, on the inflation rate.

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It expects a 10% rise in LPG and diesel prices this week, which may further stoke inflation by 56 basis points.

Mukherjee said the decline in core inflation from 9.19% in March to 7.97% in April, and the drop in food inflation from 9.47% to 8.71%, were welcome. He expressed hope that the recent monetary policy would further moderate inflation for manufactured products.

Rajeev Malik, a senior economist at CLSA Singapore, said it was likely that the core inflation for April would be revised up. “On a sequential basis, the pace of increase in WPI and WPI-core softened in April but it is difficult to be totally convinced as data revisions could significantly alter the trajectory," he said.

The industry department had revised WPI data for March to 9.04% from 8.98% reported earlier, and for February to 9.5% from 8.3%.

“February is the third straight month of a significant revision to the preliminary WPI data. If this continues, the final March WPI inflation will likely be revised to 9.5-10% range," said Malik.

The department also revised inflation data since 2004 citing a programming error that resulted in data for metal products not being incorporated.

As a result of this correction, inflation data for the last six months have marginally moved up, thus pushing the average inflation rate for 2010-11 to 9.5% from 9.4% that was estimated earlier. The department said without the correction, the inflation rate for April would have been 8.53%.

Samiran Chakraborty, regional head of research at Standard Chartered Bank, said there was no respite in prices as core inflation remained high. “A host of price pressures including hike in milk prices have been built in, which is yet to be reflected on the headline inflation," he said.

Food inflation moderated in April to 8.71% from 9.47% in March. But analysts say even with a normal monsoon this year, as forecast by the India Meteorological Department, food inflation may remain elevated. “If milk price hikes keep happening, then you could see some pressure on food prices even with a good monsoon," Chakraborty said.

The Reserve Bank of India (RBI) raised its policy rate by 50 basis points earlier in May to control inflation. Since March 2010, RBI has hiked its policy rate by 400 basis points to 7.25% in nine tranches. The central bank said in its macroeconomic and monetary developments report that it was necessary to lower inflation “as quickly and as decisively as possible" to sustain India’s growth momentum.

RBI expects the inflation rate to be at around 6% by March 2012, with an “upward bias", but to stay at the current level till September.

Chakraborty said the heightened focus on inflation may not slow India’s growth much. “There is an autonomous component of growth in India due to the large rural and semi-urban economy that do not get impacted by interest rate hikes," he said. “Consumption also may not get impacted because we do not borrow to consume."

RBI has pegged India’s economic growth this fiscal year at around 8%, a full percentage point lower than Mukherjee’s projection in his February budget speech.

Chakraborty expects rate hikes by 50 basis points in two tranches this financial year with an “upward bias", while Malik expects another 75 basis points rate hike this calendar year.

Graphic by Sandeep Bhatnagar/Mint