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Expert views - Sept inflation at 7.81 pct as fuel prices jump

Source : REUTERS
Last Updated: Mon, Oct 15, 2012 07:04 hrs
A woman farmer carrying paddy crop is silhouetted against the setting sun on the outskirts of Agartala

India's wholesale price index (WPI) rose a faster-than-expected 7.81 percent in September from a year earlier, mainly driven by higher fuel prices, government data showed on Monday.

Analysts on average had expected an annual WPI rise of 7.70 percent, a Reuters poll showed.

The annual reading for July was revised up to 7.52 percent from 6.87 percent earlier. August's inflation was provisionally put at 7.55 percent.

COMMENTARY

RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE



"Balance of risks for the September WPI was for strength after the record increase in diesel prices in the period. We expect second-order effects to feed-through the other components in the months ahead and keep the headline above 7.0 percent into end-FY13.

"Uncomfortable yes, but the firm number is unlikely to have surprised the RBI, who had been calling for administered fuel prices to be raised to tackle suppressed inflationary pressures.

"Pressure is mounting on the central bank for a quid-pro-quo move after the government initiated reforms to correct the fiscal imbalances and we expect consensus to be split as we approach the end-Oct review. Recent tough talk on inflation however narrows room for an imminent cut."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"Inflation number is very ugly and this reflects only the first round effect of the diesel price hike. We are going to see the cascading effect of the 12 percent diesel price increase going ahead as well. We are also seeing pressures building from the primary articles side. Overall the inflation situation is going to worsen until end-December. The full assessment of the inflation situation for the year as a whole can be done after we get clarity on the output of the rabi (winter-sown) crop.

"Given the fact that the pressures on growth are also acute the RBI will go for another round of CRR cut in the October 30 policy and will adopt the wait and watch approach on the policy rate front. I expect the RBI to touch the policy rates only in the fourth quarter of the current fiscal year."

SURESH KUMAR RAMANATHAN, HEAD OF REGIONAL RATES AND FX STRATEGY, CIMB, KUALA LUMPUR

"Fuel price is driving inflation higher, with the increase in diesel prices manifesting itself. We still see RBI staying pat on rates in the near term with no rate cut anytime soon."

ASHISH VAIDYA, HEAD OF TRADING, UBS, MUMBAI

"I think the negative factors on interest rates are behind us, the worst in inflation is over as this number had accounted for the fuel price increase. The fact remains that demand is slow, GDP growth is falling. But market perception is there is low probability of rate cut in October as this number is still above comfort level for policymakers."

BACKGROUND

- The finance minister called on Saturday for the RBI to take "calibrated risks" to support the struggling economy as a reciprocal measure to government fiscal efforts.

- Industrial output rose modestly in August but not enough to end a long slump in Asia's third largest economy, while consumer price inflation slowed, improving the case for a cut in interest rates that both businessmen and politicians have been pleading for.

- Central bank Governor Duvvuri Subbarao said earlier this month inflation had to be brought down further, signalling the bank would stick to a hawkish stance, and the size of the fiscal deficit would be a key factor in determining monetary policy.

- Fighting inflation pressures has been the Reserve Bank of India's top priority even as economic growth slowed to its weakest pace in three years. The central bank, which has held rates at its past three monetary reviews, is scheduled to meet on policy on October 30.

- The government must tackle subsidies to restore fiscal discipline, RBI deputy governor Subir Gokarn said on October 3, highlighting tensions between the country's policymakers amid fears that it could suffer a credit rating downgrade.

- The services sector expanded at its fastest pace in seven months in September as a spurt in new business encouraged firms to hire more staff, a survey showed, suggesting the worst of the economic slump may be over.

- India still faced a one-in-three chance of a credit rating downgrade over the next 24 months, Standard & Poor's said, although a series of reform steps launched in September had slightly improved the country's prospects.

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