Inflation eases but rate rise seen in June

NEW DELHI Mon May 16, 2011 7:28pm IST

A worker fills petrol in a car at a fuel station in Jammu May 14, 2011. REUTERS/Mukesh Gupta

A worker fills petrol in a car at a fuel station in Jammu May 14, 2011.

Credit: Reuters/Mukesh Gupta

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NEW DELHI (Reuters) - Inflation dipped in April, but upward revisions to past readings and the prospect of higher energy prices will keep pressure on the Reserve Bank of India (RBI) to raise interest rates in June and maintain its hawkish stance.

The easing was mostly due to slower rises in prices of some manufactured goods, but analysts said such prices could quicken again because of Sunday's petrol price hike by oil firms and a widely expected increase in state-set diesel prices.

The wholesale price index, the country's main inflation gauge, rose an annual 8.66 percent in April, above the median forecast for an 8.48 percent rise in a Reuters poll and below an upwardly revised 9.04 percent in March.

The February figure was also revised to 9.54 percent, 1.23 percentage points higher than the provisional figure. Some analysts said the steep revision could mean April's revised reading could be closer to 10 percent.

"What is worrisome is the large revision in the February inflation, which suggests that there are latent inflationary pressures," said Siddhartha Sanyal, chief India economist at Barclays Capital.

Most economists in recent Reuters poll expect the central bank to raise rates by at least another 75 basis points in 2011. The central bank's next review is June 16.

The RBI, which has been one of the most aggressive of major central banks in tightening policy, this month raised rates by a higher-than-forecast 50 basis points and said it was willing to sacrifice a bit of growth to tame inflation.

RBI Governor Duvvuri Subbarao said the April inflation figure was high and reiterated that inflation needs to be contained to maintain high growth. "If you try to drive up growth by driving up inflation what you will get left with is high inflation," he said at an event in Mumbai.

The most-traded 7.80 percent 2021 bond yield rose by as much as 6 basis points to 8.30 percent after the data. One- and five-year overnight indexed swap rates also jumped.

The BSE Sensex extended losses to about 1 percent.

FURTHER PRESSURE?

"The revisions are coming at around 100 basis points, so most likely this (April WPI) will come close to double digits," said Sujan Hajra, chief economist at Anand Rathi Financial Services in Mumbai. "Inflationary pressures are not abating and on top of that we expect diesel prices up 2-3 rupees."

The government may raise diesel prices by 3-4 rupees a litre as early as this month, and there are proposals to lift prices of kerosene and cooking gas, a government source said.

State-run oil refiners over the weekend raised petrol prices by 8.6 percent, or 5 rupees a litre ($0.11), a record increase that will fuel inflation in Asia's third-largest economy.

Fresh from victories in state elections, the Congress-led government does not face polls until early next year, giving it a window to raise fuel prices and ease the cost of state subsidies, though it does face some opposition from some of its populist political allies.

"I see inflation coming down a little bit next month without fuel price increases factored in and the moment you add in the domestic fuel price increases it will go up by 100 to 150 basis points provided diesel and LPG prices are raised," said Saugata Bhattacharya, an economist at Axis Bank at Mumbai.

Monetary policy is being tightened in many Asian economies as inflationary pressures in a region that is leading the global recovery.

China raised the reserve requirements for its banks last Thursday for the fifth time this year to restrain prices as consumer price inflation remained above expectations at 5.3 percent in April.

The food price index, which contributes just over 14 percent in the wholesale price index, rose 8.71 percent and the fuel price index climbed 13.32 percent in April, Monday's data showed.

Manufacturing, which contributes around 64 percent to the Wholesale Price Index (WPI), saw 6.18 percent inflation in April, compared with 6.21 percent in the previous month.

($1= 45.07 Indian rupees)

(Additional reporting by Neha D'silva and Arjun Kashyap, editing by Patrick Graham)

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Comments (1)
rajeshnayyar wrote:
It is time for us Indian to get used to a high inflation rates especially when our country exports 70% of its crude oil requirements. God only knows what would be the situation, 10-yr from now. I think, even God will say — Dont ask me, i am keeping my fingers crossed. hehehee

May 17, 2011 11:19am IST  --  Report as abuse
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