Annual inflation heads towards 8 pct

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Fri, May 16 07:04 PM

By Rajkumar Ray

NEW DELHI (Reuters) - India's annual inflation rate headed towards 8 percent in early May, clocking a 3-1/2-year high, but analysts said it was unlikely to provoke more monetary tightening for now as economic growth appeared to be slowing.

The wholesale price inflation rate, India's most widely watched measure, rose 7.83 percent in the 12 months to May 3, its highest since November 2004 and above a median forecast of 7.50 percent in a Reuters poll.

The government and the Reserve Bank of India (RBI) have taken steps in recent weeks to calm inflationary pressures in Asia's third-largest economy, and the finance minister said he expected inflation to moderate once cuts in steel and cement prices flowed through.

The surprise jump, which stemmed from higher prices of industrial fuel, metal products and some food items, briefly sent the rupee to a 13-month low against the dollar and the 10-year bond yield to its highest in more than two weeks.

"I think pressures will persist in coming weeks and (inflation) will prevail above 7 percent for the next three to four months," said D.K. Joshi, principal economist at domestic rating agency Crisil in Mumbai.

"It's a Catch-22 situation as they (the central bank) have to manage slowing growth and rising inflation. It's a tough task."

Industrial output growth slowed to an annual 3 percent in March, its weakest in six years, according to data this week, sparking concerns about a wider slowdown in the economy.

GROWTH VERSUS INFLATION

The 10-year bond yield rose 7 basis points after the inflation data to close at 7.93 percent and the rupee fell to 42.92 before finishing at 42.53/54.

Many analysts expect inflation to remain high and say it could climb to 8 percent in coming weeks.

In addition, previous weeks' readings have consistently been revised higher. On Friday, the inflation rate for March 8 was revised up to 7.78 percent from a provisional 5.92 percent.

"The particularly striking feature of today's release is the extraordinary upward revision. It's pretty clear that inflation is not 7.8 percent, maybe 9 percent at the moment and rising," said Robert Prior-Wandesforde, an economist at HSBC in Singapore.

He did not expect the RBI to act just yet, but if inflation hit double digits, he expected it to raise rates and tighten cash conditions around July-September, although he doubted that would be very effective.

"Against that background, it is going to be hard for the RBI to resist doing something more," he said.

The deputy chairman of the Planning Commission said this week the government was not sacrificing growth to calm inflation but Finance Minister Palaniappan Chidambaram has said in the past he was ready to sacrifice a bit of growth to ease price pressures.

"We reserve the right to take more administrative measures," Chidambaram told reporters on Friday.

Some analysts said the measures already taken, including import duty cuts, curbs on some exports and increases in banks' reserve requirements, could see inflation moderate and they doubted policy makers would want the central bank to act again.

"I think inflation is headed lower from current levels and in three months we expect inflation to be 50 basis points lower," said Anupam Rastogi, principal policy adviser at IDFC in Mumbai.

Policy makers expect economic growth to slow to 8.0-8.5 percent in the 2008/09 fiscal year that began in April, down from an estimated 8.7 percent in 2007/08 and an 18-year high of 9.6 percent in 2006/07.

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