Inflation continues to rise; touches 6.73%

Inflation shows no sign of abating with the annual rate based on the wholesale price index rising to 6.73% for the week ended February 3, as compared to 6.58% for the previous week. The annual rate of inflation stood at 3.98% on February 4, 2006.

The latest data renews expectations of the Reserve Bank of India taking further monetary measures aimed at containing inflation to the targeted 5 to 5.5% for FY07. It also reinforces the view that recent supply side interventions taken by the government - to ban exports of wheat and milk powder and import duty cuts on cement, steel and edible oils – will take some time to bear results.

The latest spike has occurred due to increased prices of manufactured products and primary articles like vegetables, eggs, meat and fish, oil seeds, condiments and spices, government data said. There was a slight decline in the index of fuel, power, light and lubricants by 0.4% to 320.8 on account of lower of aviation turbine fuel (11%) and naphtha, furnace oil and electricity (1% each) prices.

Reacting to the data, Aditya Birla Group Chief Economist Ajit Ranade said we will have to wait and watch the impact of various measures taken by the Central government including the latest cut in petrol and diesel prices, and the ban on export of wheat. The monetary policy announced by the Reserve Bank on January 31, 2007 and the rise in cash reserve ratio (CRR) on February 13 will also have a positive impact on inflation in the medium term, he added.

The RBI recently increased the CRR by 50 basis points to 6% in two stages. The first hike of 25 basis points will be effective from February 17 and the second from March 3.

"Market was expecting inflation around 6.5%. The high inflation figure is due to the low base-year effect. The steps taken by the Centre and the RBI may show result in the first quarter of the next FY08 and inflation may come under control," said Arun Kaul, general manager (treasury and finance) at Punjab National Bank.

The wholesale price index for all commodities stood at 209.2 points for the week under review. The index for the food articles group rose by 0.5% to 217.1 from 216.1 for the previous week due to higher prices of beef and buffalo meat (26%), eggs (7%), mutton (4%), arhar, condiments and spices, and moong (1% each). In the non-food category, prices of niger seed rose by 25% and raw rubber by 5%, while the prices of copra and castor seed declined by 1% each.

The index for the manufactured products with weigthage of 63.75 per cent in Wholesale Price Index rose by 0.3% to 181.9. The index of wood and wood products rose by 6.7%, leather and leather products (3.9%), dry and wet batteries (4.7%). The prices of textiles rose by 0.2% due to higher prices of jute hemp and mesta textiles.