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Inflation is down, not out; expect a surge later this year

Economy Aug 14, 2012

Inflation is down but the risks are all there

India's wholesale price index (WPI) rose a lower-than-expected 6.87 percent in July from a year earlier, government data showed on Tuesday.

Analysts on average had expected an annual rise of 7.37 percent. The annual reading for May remained unchanged at 7.55 percent. June's inflation was provisionally put at 7.25 percent.

A Prasanna, economist at ICICI Primary Dealership says "This data cannot be taken as evidence that inflation is coming down. There are underlying risks. Crude prices have gone up, core inflation is higher, so this fall in inflation may be temporary. We still think it will be premature for the Reserve Bank of India to cut rates."

Analysts on average had expected an annual rise of 7.37 percent. AFP

Radhika Rao, economist at Forecast PTE thinks otherwise . "Softer than expected July WPI print is likely to be perceived as a sign of easing inflationary risks, though we would be wary of revisions down the line, which could take the headline back above 7.0 percent. For the time being, this should partly calm nerves on possible runaway inflation, though thin supplies amid weak monsoon rains and increase in minimum support prices will exert upside pressures on food costs down the road.

"Weak rupee and adjustment in fuel prices also provide little comfort. Overall above-tolerance WPI and retail inflation will keep RBI wary on the policy front, with consumption sector's performance in Q2 GDP and August inflation numbers ahead of September review to also dictate policy direction. RBI will be unable to completely sidestep weak growth outlook and we retain our call for 50 bps cuts by end-FY."

Rupa Rege Nitsure, chief economst at Bank of Baroda says "While headline inflation has eased significantly in July on the back of an overall economic slowdown, the core inflation has sequentially risen by 59 basis points to 5.44 percent. Furthermore, a large part of inflation easing has happened because of administered prices of the fuel component. In my opinion, the next RBI policy action will be contingent upon some concrete fiscal steps to curtail fuel subsidies."

Subhada Rao, chief economist at Yes Bank says "Risks for inflation still remain on the upside. Some pressure on primary articles, in pulses and oilseeds, is likely to continue. In manufacturing, a weaker rupee and higher Brent prices are likely to exert pressure and the product price trajectory is not comforting.

"We expect inflation to be 7.5-8.0 percent this year, and also growth is likely to have downside risks. The April-June growth data could be in the range of 5.0-5.5 percent, and if it is so, then growth concerns at some point need to come under the central bank's consideration.

"We expect some monetary action in September or October policy. But it will also depend on how rains play out completely."

MARKET REACTION

* The benchmark 10-year bond yield dropped around 8 basis points to 8.15 percent from before the data, and compared with 8.20 percent at close on Monday.

* The 1-year OIS rate fell 4 bps to 7.73 percent from beforehand, while the 5-year OIS rate fell 3 bps to 7.03 percent.

* The rupee pared losses, trading at 55.64/65 against the dollar from about 55.72/73 before the data, while the Sensex swung to a gain of 0.4 percent, led by a rise in banks from mild losses earlier.

BACKGROUND

- RBI Governor Duvvuri Subbarao stuck to a hawkish tone on Monday, emphasising his concern that inflation remains too high and again prodding the government to restrain its own borrowing.

- Drought in some regions of the country have hit many crops and could pile pressure on food inflation in the coming months.

- Many economists have slashed their forecasts for India's growth in the current fiscal year to March to around 5.5 percent, saying weak summer monsoon rains have added to the economic headwinds.

- Industrial output fell for the third time in four months in June, adding to pressure on new Finance Minister Palaniappan Chidambaram to move quickly and pull India from its worst slowdown in almost a decade.

- The Reserve Bank of India left interest rates unchanged in July for the second straight review, showing that bringing down stubbornly high inflation is its top priority even as economic conditions deteriorate.

Reuters


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