Inflation rises to 6.95% in February; rate cuts appear remote now

NEW DELHI: India's headline inflation accelerated in February after a gap of five months, indicating that upside risks persist and diminishing hopes of a rate cut by the Reserve Bank at its monetary policy review on Thursday.

Inflation, as measured by the wholesale price index, rose to 6.95% in February from a year ago compared with a 6.55% increase in January, the commerce ministry said on Wednesday. Overall prices in the economy rose 0.44% during the month.

"The latest inflation number almost rules out a rate cut on Thursday by the Reserve Bank," said Madan Sabnavis, chief economist at CARE Ratings. "The reading, combined with the upward revision for December, shows that the problem of inflation has not been sorted out."

The government on Wednesday revised December's inflation to 7.7% from 7.5% announced earlier.

The latest data, however, offered some comfort in core inflation, which fell to 5.8% in February from 6.7% in the previous month. Core inflation, which excludes food and fuel inflation, is considered a good indicator of demand pressures in the economy.

But the decline in core inflation was more than offset by an increase in food inflation, which rose to 6.07% in February against a contraction of 0.52% in January. Economists say food inflation is expected to rise further because the seasonal effect of declining vegetable prices has waned.

"The drop in year-on-year food inflation over the last two months should prove transitory, caused by unseasonal rains last year," said Sonal Varma, India economist for Nomura. "We expect it to revert to a normal 7-10% y-o-y range over the course of 2012."

Within the food basket, inflation in the category of eggs, meat and fish rose to 20% from 18.63% in the previous month. Inflation in milk prices stood at 11.7%, while that in vegetables turned positive at 1.52% after two months of contraction.

Inflation in manufactured products, which comprises 64.97% of the overall index, fell to 5.75% from 6.49%. Seven of the eleven indices under this category rose in February.

But risks due to suppressed inflationary pressures persist as commodity prices have moved up recently in the international markets. Crude oil prices have been hovering at $120 a barrel since February.

"We expect the increase in international crude oil prices to be partly passed on to domestic fuel prices," said Aditi Nayar, economist with ICRA. "Additionally, a revision of coal prices and an increase in electricity tariffs is likely in the coming months."

Inflation in primary articles rose to 6.28% from 2.25%, while that in energy declined to 12.83% from 14.21% in January.

While RBI has started loosening its monetary policy through cash reserve ratio cuts of 1.25%, economists say the bank will not cut key policy rates before April. "Most conditions for a rate cut have been met, but we expect RBI to wait until after the Budget before cutting the repo rate," said Varma.