Some relief at last, inflation eases to 12.40%

New Delhi , Aug 28 | Updated: Aug 30 2008, 04:25am hrs
After five weeks of consistent rise, inflation declined by 23 basis points to 12.40% for the week ended August 16. The government said the decline in the rate of price rise reflects some early signs of moderation in inflation, although analysts said that it was too early to predict a downtrend. Inflation stood at 12.63% in the previous week and at 3.99% in the corresponding week in 2007.

There are some early signs of moderation of inflation, the finance ministry said in a statement, adding in the primary articles group 21 out of total 98 articles have shown decline in prices and there was no increase in prices of another 48 articles.

However, according to analysts, the decline could be temporary as crop production could be hit due to flood in many states and implementation of Sixth Pay Commission from next month would result in creation of more demand, which could be inflationary.

Inflation that still remains much higher than targeted 7% for the fiscal could prompt the Reserve Bank of India to further tighten monetary policy during the half-yearly review of the credit policy in October.

Dont start your celebrations yet, as we dont know whether this is the start of a downtrend. Oil prices have come down from peak of over $140 a barrel level to $114-116 a barrel; prices of many commodities have fallen globally. Whether the situation continues and how much of that translates for India remains to be seen, Axis Bank VP (economic and business research) Saugata Bhattacharya said. Further, the first tranche (Rs 25,000 crore) of the farm loan waiver would come in the system by October, which would boost liquidity and consequently inflation.

This years delayed monsoon is creating shortages in many primary items and the recent reports show that the prices of various important consumption items like onions are going to rise very significantly due to poor supply. We cannot draw much comfort from todays reading. Going ahead, inflation will rise further, and peak around 14-14.5% in December. Another risk is the Rs 25,000 crore, which will come into the system as the first tranche of the (farm) debt waiver scheme in October, which will fuel liquidity further. So further RBI action cannot be ruled out, Bank of Baroda chief economist Rupa Rege Nitsure said.

HDFC Bank chief economist Abheek Barua said although the chances of another repo rate hike were less likely, increase in the cash reserve ratio (CRR) could not be ruled out. Repo rate is the rate at which RBI lends short term funds to banks. CRR is the slice of deposits banks need to keep with the RBI.

The inflation has come down mainly on account of fall in prices of non-controlled fuel items like ATF and Naphtha with easing global fuel and commodity prices. Whether RBI would raise interest rates is not sure because there could be a rise again, but the case of monetary tightening is weakening. As we go into September, inflation rate is likely to come down to 12.2%-12.3% and to come down to RBI target of 7% by February. RBI is not expected to riase interest rates but with increase in liquidity from farm loan waiver, it may hike the CRR, Barua said.

According to the finance ministry statement, prices of 30 essential commodities, after remaining range bound between 5.7-6.7% for 19 weeks in the current financial year, increased from 6.74% as on the August 9 to 7.24% during the reporting week.

Although the inflation data came after the close of market hours, the yield on 10-year government bond ended at 8.77%, its lowest since July 2 and down 11 basis points from Wednesdays close of 8.88%, as the bond market anticipated a dip in the inflation rate. Inflation for week ended June 21 was revised up to 11.91% from 11.63%. Revised figures come nearly two months after the provisional data is released.