Inflation dips with help from duty cuts & base effect

NEW DELHI: After a scorching climb of many weeks, inflation finally showed signs of a letup, though the government is unlikely to soften its fight against prices anytime soon. The annual rate of inflation eased to 7.14% for the week ended April 5 from the previous week���s 40-month high of 7.41%. But the price index of all commodities rose 0.27% and that of 25 essential commodities 0.32% in this period. And experts say the price index is set to hold up above 7% in the coming weeks.

These are reasons enough for the government and the Reserve Bank of India (RBI) to continue their tough anti-inflation postures. Indeed, the RBI on Thursday hiked the cash reserve ratio (CRR) for banks while the government ordered the Monopolies and Restrictive Trade Practices Commission to probe suspected cartelisation in some sectors. Incidentally, the government���s anti-inflation stance seems to be working. Edible oil prices fell by 1.8% over the week, reflecting the import duty cuts on crude and refined oil announced on March 31.

But a bigger contribution came from the so-called base effect���there was a spurt in the wholesale price index (WPI) for the week ended April 7, 2007���against which the price index in the corresponding week of this year is compared to arrive at the inflation rate. In any case, the government still has many worries. Prices across all categories have surged compared to a year ago���primary articles (7.7%), manufactured products (7.04%), and fuel, power, light and lubricants (6.77%).

Hardening global commodity prices and domestic supply constraints too haven���t helped. Thus, inflation is likely to stay above 7% for the next 2-3 months, say experts Crisil principal economist DK Joshi, for one, says the current numbers do not tell the whole story.

���The recent fall is merely a result of the base effect and fall in prices of edible oils due to the heavy duty cut. However, April onwards, the base effect will start tapering off. Also, as commodity prices, especially food prices, are unlikely to come down significantly in the near future in the backdrop of supply constraints due to diversion of food crops to bio-fuels and disturbances in major food exporting nations and hardening of global food prices. India will feel the pinch more as it relies on commodity imports,��� he said.

The government classifies 30 items as essential commodities, of which 27 are included in the wholesale price index with a combined weightage of 17.8%. Of these, the government controls coke and kerosene prices. This group, excluding coke and kerosene, saw an annual inflation of 6.35%, up from 6.07% for the week ended March 29. ���Inflation will continue to rule above 7% for next couple of months,��� said Mr Joshi.

On the monetary front, experts say a further rise in key benchmark rates like RBI���s CRR hike on Thursday, will be of little help this time in containing inflation. ���The government has already responded with some short-term fiscal measures. However, as the pressure is mainly from the supply side and the fact that the government has not moved much on the long overdue reforms, especially in agriculture, monetary policy can achieve little,��� said JP Morgan executive director Rajiv Malik.

As the interest rate differential is already problematic, rising key rates will not be a viable option, Mr Malik said. ���Currency appreciation may not have a lasting impact as unlike other Asian economies, India runs a current account deficit. What RBI can do is to manage the liquidity via rising CRR that will reduce the cash available with banks.��� However, in the wake of rising international prices and bursting money supply, RBI would have to check liquidity.

Added Deustche Bank Asia regional economist Sanjeev Sanyal: ���A tight monetary policy over the past two years has had all the desired effects on demand-side pressure. A growth in outstanding credit has slowed down to 24% from 27% in the previous year. IIP data reveal the interest-sensitive segments such as consumer durables are slowing down. The global growth projection has also been scaled down.��� No doubt, RBI���s choice has been difficult. ���The CRR hike will be felt with a lag. So not doing anything at this juncture would itself be an important policy choice expected by the RBI,��� he added.

The CRR hike comes after finance minister P Chidambaram had said on Wednesday that the government will take all kinds of fiscal and administrative measures to rein in inflation. The index of manufactured products increased by 0.3% week-on week. However, prices of mustard oil (2%), groundnut oil (2%) and rapeseed oil (2%) fell. But on a year-on-year basis, edible oil prices saw a sharp increase���mustard oil rose 28.9% and vanaspati 11%. The index for primary articles, which includes mostly food items and non-food industrial inputs like minerals and cotton, was up 7.7% for the week ended April 5 against the previous week���s 8.9%.

The pulses index���s 1.2% Y-o-Y drop played a part here. However, on a week-on-week basis, the pulses index rose 0.8%. The index for basic metals and alloys also climbed by 20%. Iron and steel (34%) and foundries for casting forging and structurals (25%) contributed significantly to the high basic metals and alloys index.