More Monetary Tightening Likely As Inflation Soars - July 5, 2008

NEW DELHI: Costlier food and manufactured products — coupled with a weaker rupee — accelerated the annual inflation rate to a 13-year high of 11.63% for the week ended June 21. The rise in prices of food items like tea, cooking oil, vegetables and manufactured products like textiles, medicines, metals and chemicals fanned the unabated increase in wholesale price index (WPI) during the week.

Indicating that WPI, which tracks changes in the cost of living on a weekly basis, may have already scaled 12%, the government revised the inflation figure, measured for the week ended April 26, to 8.27% compared with the provisional estimate of 7.61%, an increase of 66 basis points.

Economists say that a further tightening of the monetary policy is expected later this month. Pressure is also building up for another increase in fuel prices. If crude oil prices head further north, it could push up inflation. Depreciation in the rupee is also making imports costlier, another contributing factor for inflation.The government again reiterated its commitment to tame inflation with minimum injury to growth. “One question that people ask often is that if indeed there is a trade-off between growth and containing inflation, where does the government stand. When inflation is above 11.5%, the priority for any responsible democratic government is to reduce inflation. There is no doubt about it. However, the endeavour is to see that growth is not compromised,” finance secretary D Subbarao said while speaking at the ET roundtable on inflation.

He said that the impact of surging inflation on growth will be less than what is feared by many. The finance ministry stated on Friday that headline inflation is high because main drivers continue to be petroleum products (as a result of high crude oil prices) and iron and steel products including iron ore.

Cheap Supplies May Vanish On Global Inflation

NEW DELHI: Wholesale price index (WPI)-based inflation touched a three-year high of 7% for the week ended March 22.

There seems no respite in sight as the heat of scorching inflation is being felt not just in the country but across the globe. With commodity prices rising across markets, the government’s fiscal measures such as duty cuts and export bans are unlikely to help. Many countries have put in place similar measures, which means cheaper supplies are disappearing fast.

Experts feel the ball was in RBI’s court as the government had already taken possible fiscal measures, though some drastic steps such as price control are not being ruled out if inflation remains high.

World food prices rose 40% last year, according to the UN Food & Agriculture Organisation (FAO) and the European Bank for Reconstruction & Development. The surge in prices has been led by dairy (up 80%), oils (50%) and grains (42%). The only exception was sugar, which declined 32% after having increased 20% in 2005-06.

The rising food prices are fuelling inflation globally and have become a concern with many governments. Financial leaders from south-east Asia renewed their commitment to economic integration on Friday and said they would remain vigilant against inflation, which is hurting consumers across the region.

Singapore finance minister Tharman Shanmugaratnam was reported as saying, “We are all facing the same challenge of slow growth and high inflation. We have to watch this carefully and be nimble as the situation evolves.” Similar voices were heard from Eurozone officials in eastern Europe.

Dwindling cereal supplies amidst rising demand pushed up prices of most cereals, wheat and maize in particular, during 2007. Since January 2008, international rice prices have seen a steep increase of 20%, according to FAO’s All Rice Price Index. In March 2008, the high-quality Thai 100% B was quoted at $546 per tonne, up 13% over February and 68% higher than in March 2007.

Recent sudden price rise reflects the limited global supplies, accentuated by the wide range of restrictions imposed by key major exporting countries. The tendency for further price rises, however, may diminish somewhat in the next few months with the arrival of new rice harvests in Brazil or Uruguay but also in Bangladesh, India, Indonesia, Thailand and Vietnam.

Economist Saumitra Chaudhary said, “Inflation will continue to remain at higher level at least for 2-3 months. Some cooling off is likely in case of cement and metal prices with the onset of monsoon, considered as lean period for construction activities. On monetary front rise in interest rate could help in containing the demand side pressure, but further rupee appreciation doesn’t seem a good option.”

Other experts second him on the monetary situation and feel that a hike in cash reserve ratio (CRR) is imminent.

HDFC Bank chief economist Abheek Barua says, “At this stage, I wouldn’t rule out some kind of interim action by RBI, perhaps in the form of CRR increase.” However, there is a growing feeling that the government, which has taken various fiscal measure, may now resort to harsh measures to improve the supply situation. “I think the government has taken all the measures that it could have. However, if inflation continues to rule high some harsh measures like price control cannot be rule out,” Mr Barua said.

Ministry of statistics and programme implementation secretary Dr Pronob Sen feels that unlike last year, this time, demand-side pressure is not the prime factor behind the spiralling inflation. Therefore, short-term measures such as duty cuts on imported products or holding the price line of manufactured products such as steel and cement won’t have a long-lasting impact.

WPI Breaches RBI’s Tolerance Level Of 5%

NEW DELHI: Wholesale price-based inflation breached the RBI’s tolerance level of 5% for the third week in a row, recording an eleven-month high of 5.92% for the week ended March 5, compared with 5.11% in the previous week. The government, in turn, slashed import duties on edible oil and rice.

Inflation surged by 0.81% over the previous week, as essential items like fruits, vegetables and pulses, as well as some manufactured items like imported oil, mustard oil and steel, became dearer. Inflation had been at 6.51% during the corresponding week in the year-ago period. The government, which is in a bind over rising prices, is working on a warfooting to contain the price line. Apart from the cut in customs duties on crude and refined edible oils (to 20% and 27.5% respectively) effected today, and the existing ban on export of edible oil, the government is also contemplating an export duty on steel, to increase domestic supplies.

Experts say that there is an urgent need to achieve self-sufficiency in products like food and cooking oil in order to bridge the demand-supply mismatch and contain inflation. Global prices of foodgrains like rice and wheat are at record levels and even resorting to imports could put pressure on the price lines.

Beefing up supplies could be a difficult task in the short term and the government will have to fall back on fiscal measures to discourage exports while making imports of essential goods cheaper. Says HDFC bank chief economist Abheek Barua: ‘‘Higher food and oil prices are playing a crucial role in pushing inflation up. There is urgent need to increase the food supply. However, in the short term, as raising productivity is a difficult task, the government may resort to measures such as banning exports of some commodities, and cut the import duty.’‘

The numbers came just a day after the prime minister’s economic advisory council chairman, Mr C Rangarajan, described the inflation rate as a little above comfort level, and said the council does not favour an interest rate cut policy.
Experts feel that as inflation has breached the RBI’s comfort level by a wide margin, it would be more difficult for the central bank to reduce interest rates to bolster the slowing economic growth.

‘‘ The whopping rise in the inflation rate, despite the high base effect, would not allow RBI to go for a rate cut in the near future as it is way above the central bank’s tolerance level of 5%,’’ Crisil principal economist D K Joshi said.
During the week under review, prices rose across all categories. The index of primary articles went up by 0.3%. The prices of arhar, gram and moong went up by 3%. At the same time, fruits, vegetables, maize, condiments and spices were expensive by 1%.

The index of manufactured products too rose by 0.2%. Among manufactured products, prices of imported edible oil went up by 4%, while that of groundnut oil went up by 1%. Coconut and mustard oils were dearer by 3%.

The index of fuel, power and lubricants too went up by 0.1%, as prices of furnace oil rose by 2%. Basic metal, alloys and metal products rose 20%. Prices of blooms and billets and slabs went up by a steep 30%, wire of all kinds by 25%, steel and tensile plates by 20%, and bars and roods by 3%.

Inflation Rate Soars To Nine-Month High

New Delhi: The rate of inflation soared to 5.11 per cent for the week ended March 1, the highest in over nine months, mainly owing to a rise in the prices of some food articles, certain manufactured products and aviation turbine fuel. With this, the prospects of a cut in interest rates by the Reserve Bank of India to revitalise the sluggish trend in industrial growth appear bleak.
With the inflation rate based on the wholesale price index (WPI) inching up from 5.02 per cent in the previous week, this is for the second consecutive week that it has remained above the tolerance level of five per cent set by the RBI for the current fiscal.
Expressing concern over the price spiral in the Lok Sabha, Finance Minister P. Chidambaram on Friday attributed the rise to high prices of imported food commodities while noting that the Government was ready for any fiscal measures to rein in inflation even as efforts would be made towards self-sufficiency in these essential items. Inflation is on the rise. It is a matter that causes worry to any Government. When inflation is on the rise, all of us should be concerned, Mr. Chidambaram told members in reply to a question while stressing the point that both global and domestic factors were responsible for the rise in the inflation rate from a low of 3.11 per cent.
Mr. Chidambaram pointed out that contributing to the price spiral were the soaring global prices of certain items which India has to import such as crude oil, palm oil and rice. Since inflation was driven mainly by the prices of four commodities - wheat, rice, edible oil and pulses - the only way of insulating the country from the rise in global rates was to become self-sufficient in these commodities. The Government, he said, had taken certain fiscal steps such as reduction in customs and excise duties to check the prices of such items and noted that it was willing to take monetary and other measures also.