ibnlive » Business

Oct 29, 2009 at 05:12pm IST

Inflation picks up, set to accelerate

New Delhi: The wholesale inflation rose at its fastest pace in six months in the year to October 17 and is set to quicken sharply, just as the Reserve Bank of India forecast this week in laying the ground work for a future rate rise.

The widely watched wholesale price index rose by 1.51 per cent in the 12 months to October 17, its strongest pace since May 16 when it was 1.65 per cent.

The annual rise was slightly below market forecasts for an increase of 1.59 per cent, but showed a pick up from 1.21 per cent in the week-earlier data.

RISING: A vendor arranges vegetables at a wholesale market in Siliguri.

Prices of food and fuel products declined but manufactured products rose on a weekly basis.

"Inflation is below our expectation this week because of primary and fuel prices going down. Going forward we are expecting the inflation rate to pick up to 8 per cent by March 2010," Economist at Nomura in Mumbai, Sonal Varma said.

"That is going to be higher than the RBI's projection for this year."

At its policy review on Tuesday, the Central Bank lifted its inflation forecast to 6.5 per cent for the end of 2009/10 fiscal year in March with an upward bias.

It left its policy rates unchanged but cautioned that India faces an upturn in wholesale inflation and stubbornly high consumer inflation.

Indeed, although the annual change in the WPI is still below 2 per cent, the index has risen close to 6 per cent since the end of the 2008/09 fiscal year.

Consumer inflation in August was 11.72 per cent.

The Central Bank laid the groundwork on Tuesday for a rise in interest rates by tightening credit to the commercial property sector and removed some of the emergency liquidity support measures that were extended to protect the economy from the global downturn.

The International Monetary Fund pinpointed India plus China and Australia as economies that are recovering rapidly, suggesting growing pressure for authorities to tighten monetary policy ahead of others in the region.

Reuters poll of 20 analysts following the policy review found that 9 of them expect an increase in the key repo rate by the end of January, when the RBI holds its next review, while all 20 expected a hike both in the repo and reverse repo rates by the end of April.

They currently stand at 4.75 per cent and 3.25 per cent respectively.

Policymakers have favoured continuation of fiscal stimulus and an easy monetary stance to help sustain growth and aid economic recovery.

India's driest spell in nearly four decades and floods in parts of the country have hurt crops and pushed up food prices by 12.85 per cent in the year through October 17.

On Tuesday, the Central Bank forecast the economy would expand 6 per cent in 2009/10, below 6.5 per cent predicted by the Prime Minister's Economic Panel.

It grew 6.7 per cent last year, slowing sharply from 9 per cent or more between 2005/06 and 2007/08.

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