New Delhi: Continuing its upward march, inflation hit a new high of 8.24% for the week ended March 24 and analysts expect it to rise further in the coming weeks when data captures the impact of fuel price hike announced on Wednesday. Finance minister P Chidambaram said the government is willing to take more measures contain price rise, while he dismissed BJPs criticism of the government on the price front saying that the opposition party was “merely criticising the issue” and it did not offer any “concrete steps” to tame inflation.
The Reserve Bank of India governor YV Reddy said on Thursday that it will use all the instruments available to it to arrest price rise. Analysts expect the central bank to further tighten cash conditions through the cash reserve ratio (CRR) even as they do not rule out a hike in the policy rates.
The bond market reacted sharply to inflation figures whereas the currency market turned stronger after the RBI was seen supplying dollars to oil Companies on Friday. The 10-year bond yield jumped from 8.23% before the inflation data was released to a high of 8.27% in the evening trades, while the Rupee ended higher at 42.66/67 a dollar, about 0.6% stronger than Thursdays close of 42.90/91.
Rising inflation usually leads to higher interest rates, which in turns results in lowers bonds prices, thereby putting pressure on the bond yields. Stock Markets too ended down, with the benchmark Sensex ending 198 points lower as sentiments were dampened amid hints of tighter monetary measures by RBI.
The current inflation was 0.14% higher than the 8.1% recorded in the previous week and 5.15% in the same week a year ago. It is also much above the RBI’s upwardly revised target rate of 5.5%. “Inflation will definitely cross the 9% level for the June 7 week, which will capture the impact of fuel price revisions,” says Saugata Bhattacharya, VP (business & economic research), Axis Bank.
RBI could hike CRR as liquidity conditions are benign at present and it hold on to interest rates to maintain the growth momentum, he said. Some analysts expect the RBI to raise policy rates as well.
“Inflation still remains high and needs to be tackled, we believe the RBI may hike the reverse repo and the repo rate by 25 basis points by July,” said Standard Chartered Bank’s economist Shuchita Mehta.
Repo rate is the rate at which RBI lends money to other banks and reverse repo is the rate at which RBI borrows. A hike in both these rates has an adverse effect on the liquidity, or the overall money available in the system.
Meanwhile, the revised data, which is published two months after the provisional figures are released, could push up inflation even higher by about 50 basis points, analysts said.
Revisions to data have been pretty sharp in the month February as well as March, but Fridays figures showed this trend slowed in the week ended March 29, with inflation now at a revised 7.75%, up from 7.41%. “If underlying conditions remain same, the revised inflation for June 7 week could be 9.5%, which is pretty bad,” says Bhattacharya. The primary articles, which have a 22.03% weight in the wholesale price index (WPI), rose by 9.29%, while manufacturing index, having a 63.74% weight in WPI, was up 7.95% during the March 24 week. The fuel, power light and lubricants index, which contributes 14.23% of the inflation basket or the WPI, rose by 7.8%.
