Inflation at 7.61%, FM talks of more steps

Written by Reuters | New Delhi, May 9: | Updated: May 9 2008, 23:42pm hrs
Indian annual inflation rose to a 3- year high of 7.61 percent in late April, prompting the finance minister to pledge that the government would take more action to tame prices if needed.

However, the finance minister, Palaniappan Chidambaram, said the fact that inflation had shown only a marginal increase in late April was a relief and not statistically significant.

Still, wholesale inflation, the country's most closely followed measure of price trends, has more than doubled since November as India, like other countries globally, saw its import bill for oil and food prices soar. Analysts said recent moves by the government and the central bank to boost supplies and curb inflation-stoking cash circulating in the banking system would pay off, but inflation would remain high for some time.

"The fiscal and trade measures taken by the government should start having an impact in the coming weeks. Particularly the cut in steel prices announced by steel producers should reflect in the index," said Sonal Varma, an economist with Lehman Brothers in Mumbai.

Steel firms agreed to trim prices on Wednesday, under pressure from the government.

"However, with oil prices still firm, we expect the WPI index to remain above 7 percent in the coming weeks," Varma said.

Government data showed on Friday the wholesale price index for the 12 months to April 26 rose at its fastest pace since Nov. 13, 2004, edging up from 7.57 percent in the previous week's data. The result was in line with expectations.

Financial markets showed little reaction to the data. The yield on the 10-year federal bond held steady at 7.86 percent and the partially convertible rupee at 41.38/39 per dollar, was unchanged from before the data's release.

MORE MEASURES POSSIBLE

The weekly data has seen some sharp upward revisions in recent weeks and the revision for the March 1 period was a jump to 6.21 percent from an initial reading of 5.11 percent.

Some economists see inflation creeping up to 8 percent in coming months.

But talking to reporters shortly after the data was published, Chidambaram said the small pick up in inflation revealed by the latest figures was not statistically significant.

"It has come as a big relief," he said.

Chidambaram said the government would take more measures if needed to calm prices. It has cut duties on some imports and banned some exports in recent weeks as part of its drive.

"We are in the process of persuading the cement companies to roll back prices. If that succeeds, that will also be an administrative step," he said, adding he expected inflation to moderate once the various measures kicked in.

The government faces a string of state polls this year and a national election by May 2009. Those prospects, plus rising prices -- especially of food and metals -- have dominated the media headlines in recent weeks.

The central bank has also stepped in to try to control price rises, although economists say there is a limit to what it can do, largely because inflation stems from supply constraints not domestic demand.

Last month, the Reserve Bank of India (RBI) announced a 25-basis-point increase in the cash reserve ratio (CRR) to 8.25 percent, its highest level in seven years. "We expect the RBI to keep policy rates unchanged in 2008, but hike the CRR by at least 50 basis points to manage liquidity," Lehman's Varma said.