Re slumps as inflation hits 4-year high

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Saturday , May 17, 2008 at 0229 hrs The money market reacted sharply as the wholesale price index (WPI) rose 7.83% for the week ended May 3, scaling a fresh 44-month high—against 7.61% the week earlier—owing to a rise in food and industrial fuel prices. The latest inflation numbers were far beyond market expectations of 7.50%.

In a kneejerk response, the rupee hit a 13-month low near 43 a dollar, but subsequently recovered to end stronger following large dollar sales by exporters. The ten-year bond yield scaled 5 basis points to 7.93%. Traders witnessed selling pressure on the expectation that the Reserve Bank of India, which hiked CRR by 75 basis points in three phases last month, could come up with fresh steps to help rein in surging inflation.

The partially convertible rupee ended at 42.53/54 a dollar, off an intra-day low of 42.92, its weakest since April 12, 2007. It had closed at 42.75/76 on Thursday. Experts say that with the continuing upsurge in inflation, both the government and central bank would definitely find themselves in a dilemma over whether to address slowing growth or check rising prices.

“The inflation figures are beyond our expectations. Currency depreciation, dwindling inflows and oil pressures are worsening the scenario. We expect inflation to hover at around 7.70-7.90% in the next couple of weeks,” said Indranil Pan, chief economist with Kotak Mahindra Bank.

Pan expects inflation to cross 8% if rupee depreciation and high crude oil pressures continue to persist. “If oil and food commodity prices continue to rise, there is a significant risk that inflation will hit double digits in the not too distant future,” concurs Robert Prior-Wandesforde, senior Asian economist at HSBC Bank.

Analysts expect at least a 25-bp hike in CRR in the imminent future, although they say a 50-bp rate hike cannot be ruled out. Meanwhile, Pan feels the rupee’s weakening is expected to continue, as there may not be significant inflows due to the adverse global scenario. High crude prices will add fuel to the fire, he says.

“A depreciating rupee is washing away the fiscal steps taken by the government,” Pan added. Owing to flaring global crude oil prices, the cost of industrial fuels like naphtha has increased by 7%, furnace oil by 4%, light diesel oil and bitumen by 2%. Crude prices touched $126 a barrel last week.