Re slumps as inflation hits 4-year high

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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.

“A fall in steel and cement prices may not help combat inflation in a big way. There may be more measures that need to be taken by the government, but we hope the central bank does not or else there would be a liquidity mess. Only if the monsoons are good, can we get some relief,” Pan added.

Meanwhile, in New Delhi, Left parties asked the government to take urgent measures, including banning futures trading in essential items and action against hoarding, to check the rising price graph. CPI(M) politburo member Sitaram Yechury said “a wrong diagnosis” of the price problem was leading to the slowing of the economy.

More steps possible: FM

Finance minister P Chidambaram on Friday warned steel and cement manufacturers of more administrative steps if the rate cuts announced by them were not enough to check the price rise. Chidambaram said the rise in inflation is “indeed worrying”, but the decline in the inflation rate of primary articles is a silver lining amidst dark clouds.

“The rollback of steel and cement prices is not reflected in the data. We are waiting for steel and cement (price) reductions to come into force, but we always reserve the right to take administrative measures if they are not enough. But we hope that what has happened to the primary article group will also be reflected in the manufacturing items category,” he said.