Tuesday, April 26, 2011

March inflation rises to 8.98% vs 8.31% in Feb

The wholesale price index (WPI) for the year rose to 8.98% in March as against 8.31% in February on higher fuel and manufactured product prices. A CNBC-TV18 poll forecasted a 8.38% rise in the figure for the said month.

The reading for January was upwardly revised to 9.35% from 8.23%.

The food price index rose 8.28% and the fuel price index climbed 12.97% in the year to April 2. In the previous week, annual food and fuel inflation stood at 9.18% and 13.13%, respectively. The primary articles price index was up 11.40%, compared with an annual rise of 12.97% a week earlier.

The picture doesn't look too bright to Sonal Varma India economist at Nomura Financial Advisory & Securities (India). "Starting the year with 9% brings down all expectations that inflation could come down in April. Adding more gloominess to that are talks of bad monsoons. The core side of the number has clearly gone up quite substantially."

Jonathan Cavenagh senior forex strategist for institutional forex sales-Asia at Westpac Institutional Bank, said this was a pretty strong inflation print for India—9% versus 8.36%. “RBI won't be too happy with that and more broadly inflation is proving to be quite sticky around this 8-9% level, despite what could be considered an aggressive tightening cycle since early 2010. I don't think this does INR much good as Indian equities are coming off on the back of this data. So I wouldn't be surprised to see USD/INR higher and/or INR underperform other Asian currencies."

To Ashutosh Datar economist at IIFL the inflation trajectory seems to have changed. “The expected decline in inflation is just not happening and looks like we have underestimated the underlying pressure on prices."

More rate hikes in store?

Despite of the rate hikes that the Reserve Bank has done, inflation has refused to come down. "Why is that," questions Varma. In reaction to this higher-than-expected reading, she expects a 25 basis points and not a 50 basis points rate hike on May 3.

More monetary tightening is inevitable after today's data and the case for a 50 basis point hike in May is strengthened, according to Datar.

The RBI has been clearly worried about the fact that the growth might actually slowdown very significantly if it tends to become very hawkish on the inflation side, said Indranil Pan chief economist at Kotak Mahindra Bank. "Having said that I would think RBI would move ahead with another 75 basis points, starting with the 25 basis points on May 3."

Though Anant Narayan managing director-regional head of fixed income and currency trading of South Asia at Standard Chartered Bank doesn't totally rule out the possibility of a more-than 25 basis points hike, he says on May 3 the hike may be capped at 25 bps level. "Given that every 45 days they do a review so they have plenty of time to take this as it comes along," he added.


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