Saturday, April 26, 2008

Inflation Climbs To 7.33% But Price Line Holds Steady

NEW DELHI: Inflation climbed to 7.33% for the week ended April 12, as measured by change in the wholesale price index (WPI) from the level of the WPI for the corresponding week in 2007. This is higher than the previous week’s 7.14%, but lower than the 7.41% peak reached in the week ended March 29.

What is heartening, however, is the price index has hardly budged from the level attained at the end of the previous week, suggesting that the measures initiated by the government to hold the price line have begun to take effect. The change in the WPI from the level attained for the week ended May 5 was just 0.13%.

The index for fuels and manufacturing remained static. While the index for primary articles moved up 0.47% over the week, that for the all-important sub-category of foods moved up a mere 0.04%.

The picture of a virtually-static price index yielding significant levels of inflation on a year-on-year basis has led experts to say the effect of a low base, against which the comparison is being made, is responsible for the high level of inflation this week. Looking at the change over a year, the price index has moved up for all the categories including primary articles (8.17%), manufactured goods (7.16%) and fuel, power, light and lubricants group (6.81%). Experts say the low base effect will continue till October.

“This week, the rise in inflation can be attributed to low base effect to some extent. Last year, during the week ended April 14, 2007, the index fell marginally to 211.4 from 211.5 the previous week. Despite this, WPI rose 0.1%, only the inflation went up to 7.33%,” Crisil chief economist D K Joshi said.

“Last year, from April onwards, the inflation rate had started to decline. While in April 2007, it was ruling at 6%, by end-October 2007, it came down to 3.1%. Thus, it is highly likely that till October, even a small increase in the index during the corresponding week this year will lead to higher inflation. The trend may persist till the year-end,” Axis Bank vice-president Saugata Bhattacharya said.

“It doesn’t mean the fiscal measures taken by the government will not yield result. The better food crop projection indicates that prices may soften. However, high global commodity prices can neutralise the cooling-off effect on prices due to the slew of fiscal measures taken by the government,” he said.

This week, while crude touched the all-time high of $118 per barrel mark, rice prices too continue to remain at higher level of $1,200 per tonne in the international market. However, wheat prices softened to $9 per bushel from $12 a bushel in the backdrop of expected better crop this year.

Despite the fiscal measures that government could have taken to rein in price rise, inflation continues to remain at three-year-high level. It is expected RBI may announce a change in one of its policy rates, the repo rate. These are the rates at which RBI lends (repo) and borrows (reverse repo) from the banks in order to manage the liquidity and maintain the price stability.

The finance minister P Chidambaram on Friday said in Lok Sabha that every measure within the power of the government was being taken and would be taken to calm inflation. “I am confident inflation will moderate over time,” Mr Chidambaram said, adding that it was being largely driven by high international commodity and food prices. Earlier, he said the central bank may introduce more measures in its April 29 monetary policy announcement to contain inflation.

“Though the measures to contain inflation may result in moderation in the economic growth, it is the endeavour of the government to sustain the momentum of high growth with price stability,” he added.

While the government has asked the steel industry to hold the price line, so far no step has been taken regarding containing the iron ore prices, the main input of steel industry that has surged 47.09% over a year.
Prime minister Manmohan Singh on Wednesday said the government will take all possible steps to curb inflation, including increasing the procurement of food grain.

Standard and Poor’s chief economist Subir Gokarn said, “It’s almost three weeks since government started its anti-inflation campaign. However, the inflation continues to maintain its three-high level this week too. Thus, it is highly likely that RBI may go for repo rate hike and it will mean that the growth forecasts may correspondingly go down.”

Higher food and energy cost are stoking inflation across the region. Prices in Singapore jumped the most in 26 years in March, Japan’s rose at the fastest pace in a decade, and inflation in Australia topped 4% for the first time in seven years. Vietnamese consumer prices rose in April at the fastest pace since at least 1992.

On April 17, RBI raised cash reserve ratio to a seven-year high of 8% from 7.5%. The move reduces the supply of money in the financial system by forcing commercial banks to park more money with the central bank.

“At this point, we are talking about a GDP growth rate of 8.1%, assuming no increase in interest rates. However, if interest rates are hiked, I think a more pessimistic forecast may be justifiable, around 8%, or 7.5-8% if they take the range,” Mr Gokarn said.

It is expected RBI may prefer to go for sector-specific measures like raising the margin for collaterised credit to traders in commodities or bring down the tenure of such credit facilities so that further rollover or continuation can be done only after the end-use supervision. Meanwhile, RBI may ease the credit flow to the agricultural sector to boost production which has slowed down.

Some even expressed the possibility of further add-ons in the list of commodities that are barred from trading in the commodities exchange.

“There is no doubt this time that the pressure on prices is the outcome of the supply-side pressures. However, steep rise in prices can be attributed to some extent to futures trading in international market. Futures reflect what people think will happen. Now, as in the past year, the perception that prices of food commodities will continue to rise in the backdrop of strong demand and low supply remained strong, traders hold their deliveries that created shortage and thus led to price rise in spot market,” HDFC bank chief economist Abheek Barua said.

During the week under review the index of primary articles which mainly includes food items and non food industrial inputs went up by 0.5% week-on week. although price lower prices of gram(3%) and barley, arhar, masur, pork and condiments and spices (1% each) declined, the index of mineral group rose by 5.8% as compared to previous week due to higher prices of iron ore (6%) and other minerals (7%). The Y-o-Y rise in iron ore prices went up to 47.09%.

However, the index of manufactured goods includes base metals and alloys steel and iron, cement, remained unchanged week-on week. While the prices index of edible oils went down by 1.6% on week on week basis the index of basic metals and alloys remained consta alnog with of sttl and ioron. However Year on Year rise is significant-edible oils (14.69%) , metals and alloys (20.14%) and steel and iron (34.15%).

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