Inflation spirals to 13-month high
Govt takes steps to curb exports; Outlook remains negative.
The inflation rate moved past the critical six per cent mark to a 13-month high of 6.68 per cent for the week ended March 15, 2008.
The weekly spike is almost a full percentage point, given that the annual rate of inflation based on the wholesale price index (WPI) stood at 5.92 per cent for the previous week ended March 8.
This is the highest weekly inflation level since January 27 last year when it stood at 6.69 per cent. It is also the fourth consecutive week that the inflation rate has stood above 5 per cent, breaching the Reserve Bank of India (RBI) targeted level for the current fiscal.
Spiralling inflation dashes hopes of an interest rate cut by the RBI in its annual review of the monetary policy for 2008-09 on April 29.
"There is a risk that the central bank could tighten policy rates at or even before the April meeting," said Rajeev Malik, senior economist, JPMorgan.
The latest spurt has been driven by an across-the-board increase in prices, especially iron, steel and food articles.
"Apart from food prices, steel prices have sharply risen in the last two weeks. For the week ended March 15, prices of iron and steel increased 27 per cent. This sharp rise is driven largely by a demand-supply mismatch and increase in input costs for steel producers," said Saugata Bhattacharya, vice-president, Axis Bank.
Given the continuing risk of higher global food prices, crude and other commodities, the outlook remains negative.
The government has moved swiftly to address the problem. Late Thursday night, the Directorate General of Foreign Trade withdrew the benefits of the Duty Entitlement Passbook (DEPB) scheme available on nearly 50 items including steel and non-basmati rice, certain mineral ores and cement, among others.
The move is designed to discourage exports of these items and increase their availability in the domestic market to ease prices.
This is the second fiscal measure in less than two weeks aimed at moderating prices. Last week, the government slashed import duty on edible oils and banned their export for a year. It also cut duties on milled and non-milled rice.
Commerce Minister Kamal Nath said the government is considering more measures including a ban on non-basmati rice exports. "We will also recommend scrapping import duty on steel," he said.
Economists said further fiscal steps are expected. "Rationalisation of excise and customs duties may be expected," said D K Joshi, principal economist, Crisil.
Malik added that the sudden spike could be partly explained by the lagged effect of upward price revisions by large domestic steel companies that were covered in the WPI.
"The prices of several steel-related items in the WPI have not been updated in a timely manner and this time the revision for some of the items was packed in the week-ended March 8," he said.
A timely update of upward price revisions by large domestic steel companies would have eliminated the sizeable and unexpected jump in headline inflation, he added.
Inflation data have been regularly revised upwards in recent weeks, with the scale of the revision being significantly high.
For the week ended January 19, the inflation rate has been revised to 4.45 per cent compared to the provisional figure of 3.93 per cent.
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