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India (IBTimes)- The wholesale price index (WPI)-based inflation rate has hit a three-year high of seven percent for the week ended March 22 as against 6.68 percent in the week before and 6.54 percent a year ago, raising fears that India might be heading for an economic slowdown unless the government takes immediate steps to curb the rise in prices.
According to the latest government data, prices of fruits and vegetable, pulses, cereals, eggs, meat and fish have gone up, while condiments and spices were cheaper.
The index for minerals group jumped 38.2 percent on week, pulled up by a 46 percent increase in iron ore and a 57 percent rise in steel ingot prices, the government data said.
Among Fuel, Power, Light and Lubricants category, prices of furnace oil increased by two percent.
In the manufactured items category, sunflower oil shot up by nine percent, vanaspati by four percent while butter, mustard oil, sugar and groundnut oil became expensive by one percent each.
At the same time, prices of ghee and coconut oil decreased by 1 percent each.
Elsewhere, electrode prices jumped up by 14 percent, steel ingots (plain carbon) by 57 percent, forging by 22 percent, cast iron casting by four percent and zinc by three percent. Car chassis (assembled) moved down by one percent while lead and zinc ingots were down by three percent.
For the Indian consumer, inflation spells bad news as not only the prices of vegetables, cereals and various manufactured goods would continue to rise but also getting loans would become tougher if India's central bank, the Reserve Bank of India (RBI) decides to tighten monetary policy to rein in inflation.
According to market analysts, the markets were gripped with concerns on Friday that following the rise in inflation, further stringent monetary measures, including a hike in Cash Reserve Ratio (CRR), could be on anvil. A hike in CRR, which is the rate of amount all the commercial banks need to maintain with the central bank, will affect the market as it sucks out liquidity in banking system, the analysts said.
High inflation could prompt the RBI to take tight monetary measures, like raising short-term lending and borrowing rates and squeezing money supply in its annual credit policy scheduled to be announced on April 29, the analysts said.
According to D.K. Joshi, chief economist, Crisil, while monetary policy takes time, fiscal measures would have a quick impact in taming inflation though price pressure is likely to continue in the short term.
"Price controls are not a good idea. It clearly shows the government's desperation in curbing inflation," Joshi said, noting media reports which stated that the government is also contemplating imposing price controls on various essential consumer and industrial commodities if the slew of measures taken to contain inflation do not yield the desired results.
"It looks like there has been some updation of the past prices and that is why we are seeing this kind of jump in the price index," said A. Prasanna, chief economist, ICICI Securities.
"I wouldn't be surprised if we see a CRR hike today itself," said Prasanna. "But the flows have to support the action by RBI and with uncertainty in equity markets right now, the flows are not as strong and that is probably why RBI may not immediately go for that kind of an action."
"Probably once the capital flows pick up, maybe that will be a more sustainable kind of strategy. So immediately for signaling effect, some kind of monetary action is needed," he said.
However, Indranil Pan, chief economist at Kotak Mahindra Bank feels that due to the non-transparent way in which the re-pricing and the sort of lag effect which is seen in certain items that have been incorporated into the inflation numbers, the broad range comes to 6.50-6.95 percent.
"I think inflation has been a concern and the concern is global, the inflation is more of imported rather than the Indian one. Globally soft commodity prices have shot up by something like 70-100 percent in the last two-three months which is causing lot of disruptions all over the world and India is in fact, a part of that problem," said Ketan Karani, vice president (research), Kotak Securities.
"At 7 percent it doesn't augur well for the country as it would eat into growth. But, the concern lies in whether growth will be sacrificed for inflation control. Whatever monetary measures we take for inflation control, they will not have much of an impact because the supplies are constrained," Karani said.
According to Karani, inflation is a supply side problem that cannot be solved in months. "It will take years for this kind of problem to be solved. The rate of change of inflation can be higher or can be lower, but the real increase in supply would take years to come. If one looks at the world food stock, it's almost at a 70-year low and prices are at an all time high. So it's something which is scary all over the world, it's not only in India," he said.
"India is still having relatively moderately low inflation than the global inflation. If one looks at China, Taiwan or anywhere in the US, inflation is much higher than what it is in India. Yes, 7 percent is a scary one because of base effect and also due to some increases in iron ore and other prices, but what we believe is that the worst is behind us. Things can only get better and improve from here on," he added.
Philippine inflation accelerated at 6.4 percent from a year earlier, the fastest pace in 20 months in March, a report showed. China, Indonesia and Pakistan all have inflation rates of more than 8 percent. Sri Lanka's was 23.8 percent in March.
"There is unlikely to be any tightening on the monetary side. There maybe a tightening through the forex side where the central bank allows the rupee to appreciate and therefore that tightens domestic money supply to some extent. But we really do not expect a CRR hike or an interest rate hike at this stage. And that is because while inflation is scary and inflation is likely to get scarier if you look at last year's trends and the base effect, we do not see any respite for high inflation for the next three months or so," said Seshadri Sen, strategist, Macquarie Securities.
"This is supply side-led inflation, interest rates have already gone up, we are in a situation where the economy is slowing and the uncertainty over capital flows is very high. We think that the RBI will wait and watch in this situation and not raise CRR or raise domestic interest rates, but prefer to act through the currency side and see what happens. If it still does not come down, maybe later in the year they may look at tightening if at all," he said.
Robert Prior-Wandesforde, senior Asian economist, HSBC Holdings, said there is a chance that WPI-based inflation ought to be at least 8 percent over the next few months, even if oil and other commodity prices do not continue to rise. "If they do peak, it will be somewhat higher than that. So, it is going to get worse before it gets better," he said.
"A lot of these commodity prices are driven by normal fundamental factors. Speculative activity by its very nature is extremely hard to predict. I have come up with an 8 percent WPI forecast as commodity prices remain at the current levels. If they go higher then clearly WPI inflation is going to go higher and if they come lower then the reverse will be true," he added.
"We expect that the RBI will hike rates in April, instead of leaving them unchanged, following the run-up in inflation. The central bank will have no option," said Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai, in a research note. "We also expect the central bank to encourage the rupee to gain to curtail prices."
According to Poddar, "The current spike in inflation is being caused primarily by higher global commodity prices in agriculture, fuel and metals feeding through to domestic inflation."
However, there are many who feel that raising interest rates is not the solution because of concerns about slowing growth.
"I would expect interest rates not to be raised at this time," said Shashanka Bhide, chief economist at the National Council of Applied Economic Research in New Delhi. "Simply because there is also concern with respect to growth. There may be other measures so that there is no excessive growth in liquidity and money supply."
According to L.V. Prasad, chief currency trader at IndusInd Bank in Mumbai, the central bank might not raise interest rates because that could hurt companies. "Raising interest rates is a solution, but it might hit companies hard," Prasad said. "I think it will wait and watch to see what happens to inflation after the government took the fiscal measures recently."
