Inflation rate rises to 4.41 percent for the week ended July 14, 2007

Higher food prices pushed up the inflation rate to 4.41 per cent, but analysts expect the Reserve Bank not to raise key rates when it reviews the monetary policy on July 31. The inflation rate based on wholesale prices index, the key measure of cost of living, is still within the central bank’s medium-term target of 4-4.5 per cent and annual target of 5 per cent for this fiscal.

Vegetables costlier

Among the primary articles, prices of vegetables rose sharply by 7 per cent during the week, while those of cereals rose by 0.9 per cent.Though inflation figures will have a bearing on the measures to be announced by the RBI to regulate money supply, analysts said inflation is within control and there was little chance of the banking regulator going for a rate hike. Finance Minister P Chidambaram had indicated last week that high crude oil and food prices did not necessarily mean that monetary policy would be tightened further. However, the ever rising cost of vegetables may be a cause of concern for the government. Vegetable prices soared seven per cent for the week ended July 14 registering the highest increase among all items. Last week too prices of vegetables had gone up by 4.4 per cent. WPI, on which inflation data is based, rose by 0.1 per cent to 212.9 per cent during the week compared to 212.6 per cent in the previous week.Prices of some food items, however, came down marginally. Fish-marine became cheaper by two per cent while urad prices declined by one per cent pulling down the overall price of pulses by 0.3 per cent during the week. In the non-food articles category, prices of fibre rose by 2.2 per cent.

Manufactured products

Among manufactured products, rates of rice and bran oil rose by three per cent each, while imported edible oil, groundnut oil, cottonseed oil and oil cakes became costlier by one percentage point each. However, the prices of sugar, jaggery and gingelly oil declined by one per cent. Prices of fruits fell by 0.9 per cent. Egg, meat and fish also became cheaper by 0.5 per cent each. Index of paper and paper products group rose by 0.1 per cent to 192.8 points from 192.7 points last week due to marginal rise in the prices of printing paper white.Inflation numbers for the week ended May 19 was revised to 5.30 per cent compared to the provisional figure of 5.06 per cent. This was done as WPI for the week stood at 212.4 points against the provisional figure of 211.9.

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RBI may retain interest rates, and may raise CRR

The Reserve Bank of India is likely to keep key interest rates unchanged in its quarterly review of credit policy on July 31, but may increase the requirement for banks to keep cash with it to absorb excess liquidity in the system, economists and industry players feel. "Inflation concerns have been mitigated and interest rates are at peak. However, the desire to mop up liquidity remains and a hike in cash reserve ratio cannot be ruled out," ABN Amro Country Executive (India) Romesh Sobti said.

After touching a 14-month low of 4.03 per cent, inflation has been on an upward trend on account of rising prices of food, especially vegetables. For the week ended June 30 and July 07, the wholesale price index stood at 4.27 per cent. Even at this level, the index is within RBI's limit of five per cent for this fiscal and medium term target of 4-4.5 per cent. On the other hand, there is ample liquidity in banking system. The overnight rate at which banks borrow from each other in the call money market has been below one per cent for sometime now. On July 13, the rate was 0.49 per cent. "I expect RBI to raise CRR in the policy review to manage liquidity," HDFC Bank chief economist Abheek Barua said.

Cash Reserve Ratio (CRR), the requirement for banks to keep a certain portion of their deposits with RBI, stands at 6.5 per cent. Between December 2006 and March 2007, the ratio was increased thrice by half a percentage point each, which sucked more than Rs 45,000 crore from the system. Barua said the advantage of a CRR hike was that it worked dynamically. While the initial impact is to absorb liquidity, it dampens the entire process of money creation that works through successive rounds of lending, he said.

Echoing similar views, Crisil Principal Economist D K Joshi said there was no need to change key lending rates, but a CRR hike was a possibility to rein in liquidity. Oriental Bank of Commerce executive director Allen C A Periera also said interest rates should be left unchanged for the time being.

Although economists and banking experts agreed that some action from the RBI to curb liquidity was due, they differed on the methodology it should adopt. Some experts said a CRR hike will be too much for the banking sector to take. Joshi also said instead of a CRR hike, the RBI might use another tool -- Monetary Stabilisation Scheme (MSS) -- more aggressively for liquidity management.

The RBI Governor, Y V Reddy, had recently said that taking into account high expansion of money supply worldwide, and given the monetary overhang of 2006-07, it was important to contain monetary expansion at around 17 per cent this fiscal, in consonance with the outlook on growth and inflation. High funds inflow, which is leading to excess liquidity, might see some moderation due to tightening of norms for external commercial borrowings by the government recently and pick up in credit offtake by August.

"In the given scenario there is no need for tinkering with the interest rate as well as CRR rate as inflation is low and credit demand has slowed down," Punjab National Bank executive director K Raghuraman said. MSS auction is a better option to manage liquidity since an increase in CRR could push up interest rates. This could lead to higher inflow of foreign funds as they would find Indian market more attractive. This would lead to further appreciation of Rupee, he said.

The Source: The Hindu - July 17, 2007