India's inflation rate eases to 12.34 percent but pressures remain

A year ago, the inflation rate stood at 3.94 percent.

According to the WPI, which is India's most closely watched cost-of-living monitor as unlike the consumer price index (CPI), which is published monthly, the WPI covers greater number of products in its computation and is published weekly, inflation declined primarily on account of lower prices of primary articles, especially fruits and vegetables, pulses.

The index for the Primary Articles Group (which has a weight of 22.02 percent on the WPI) declined by 0.4 percent.

The index for 'Food Articles' group slipped by 0.8 percent due to lower prices of fish-marine (down 13 percent), fruits & vegetables (down 2 percent) and jowar, arhar and urad (down 1 percent each). However, the prices of tea moved up by 3 percent that those of eggs and condiments & spices rose by 1 percent each.

The index for 'Non-Food Articles' group, however, advanced by 0.4 percent on account of higher prices of raw silk (up 14 percent), raw cotton (up 3 percent) and copra (up 1 percent). However, the prices of castor seed and raw rubber eased 1 percent each.

The index for the Fuel, Power, Light & Lubricants Group (which has a weight of 14.23 percent on the WPI) remained unchanged at its previous week's level

The index for the Manufactured Products Group (which has a weight of 63.75 percent on the WPI), however, remained a concern, rising by 0.2 percent compared to the previous week.

The index for 'Food Products' group jumped by 0.2 percent due to higher prices of imported edible oil (up 2 percent) and oilcakes (up 1 percent). However, the prices of rice bran oil fell by 2 percent and those of cottonseed oil and rape & mustard oil declined by 1 percent each.

The index for 'Paper & Paper Products' group climbed by 0.2 percent, driven by higher prices of newsprint (up 1 percent).

The index for 'Chemicals & Chemical Products' group surged up by 0.5 percent on account of higher prices of acid (all kinds) (up 10 percent) and phenol (up 1 percent).

The index for 'Basic Metals, Alloys & Metal Products' group soared by 0.4 percent due to higher prices of cast iron spun pipes (up 15 percent), pipes & tubes (up 6 percent), lead ingots (up 3 percent) and zinc ingots (up 2 percent). However, the prices of zinc decreased by 2 percent.

The index for 'Transport, Equipment & Parts' group moved up by 0.2 percent due to higher prices of bicycles (up 3 percent).

A statement from the Finance Ministry said that in the 'Primary Articles' Group, out of a total of 98 articles, 18 articles have shown a decline in prices compared to previous week. "These included among others, rice, jowar, moong, masur, arhar and urad, tomatoes, groundnut, mustard, caster and linseed, marine fish and raw rubber," the statement said.

"Another 54 articles have shown no increase in prices," it said.

In the 'Fuel, Power, Light & Lubricants' Group, the prices of all the 19 commodities remained unchanged, the Finance Ministry said.

Despite rise in the index of 'Manufactured Products' Group, the Finance Ministry noted that out of 318 commodities, a large number, 294 in all, have shown no increase in prices over the last week. "In the case of 7 commodities, there has been a decline in prices. These commodities include edible oils (rice bran, cottonseed, mustard and gingelly oils), groundnut oil cake, zinc and synthetic yarn," it said.

"Only 17 products, particularly sugar, hessian bags, mustard and groundnut oil, zinc and lead ingots, deoiled and mustard cake, caustic soda, nylon filament yarn, cast iron spun pipes, newsprint and white printing paper and acids witnessed an increase in prices," it added.

In conclusion, the Finance Ministry said, inflation continued to show signs of moderation with prices of 30 essential commodities showing decline in prices,led by lower prices of rice, most of the pulses and mustard oil.

According to economists, the moderation in inflation rate was a good sign but was not enough to make the central bank, the Reserve Bank of India (RBI) ease up.

"Overall, we expect monetary policy to stay tight as underlying demand pressures still lurk which may lead to higher inflation," said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.

According to Rupa Rege Nitsure, chief economist at Bank of Baroda, inflation should stay in double-digits until December. The true direction of the index would only become clear after summer crops were harvested, she said.

The economists also felt that global crude oil prices would determine the direction of India's inflation rate. Though oil prices, India's biggest import, have fallen from an all-time peak of $147.27 per barrel hit on July 11, to hover around $110 per barrel on Thursday, yet the prices are far above the comfort level.

Last week, the RBI warned in its annual report that there were several short-term risks to the growth prospects of Asia's third-largest economy, India, stemming from both global and local factors.

"As the inflation rates have hardened beyond tolerable levels, monetary policy would continue to address aggregate demand pressures, which appear to be strongly in evidence," the report said, adding that the immediate challenge of the central bank was to bring down inflation to a tolerable level as soon as possible.

In July, the RBI raised its key lending rate (repo rate) and banks' cash reserve requirements (cash reserve ratio or CRR) by 50 basis points and 25 basis points to 9 percent each, to tame inflation and curb credit growth. The apex bank also revised its inflation goal for the current fiscal year up to 7 percent from around 5.5 percent.

Echoing similar sentiment, Finance Minister P. Chidambaram also warned that no conclusion can be drawn from one week's inflation number and due to persistent inflationary pressures, the government must not let down its guard.

Industry and Commerce Minister Kamal Nath, however, gave some hope to investors that the RBI might ease its tight monetary stance before the end of this year.

The government's supply-side measures had begun to take effect and inflation should soften from current levels, Nath said, adding that he expects the Indian economy to expand in excess of 8 percent in the current fiscal year (2008-09).

However, the economists feel that inflation could touch a peak of 14 percent before moderating and D. Subbarao who replaced Y.V. Reddy as the new governor of the central bank, would continue his predecessor's hawkish stance.