No respite from high inflationary pressures in FY'12: Barclays

NEW DELHI: India is likely to reel under inflationary pressures for some time to come, and the Reserve Bank of India will continue with its "tightening" measures to curtail this rising trend, says a report by Barclays Capital.

The rising 'core' inflation would prompt the Central Bank to turn extra-cautious in containing inflation in the current financial year.

"We factor in a cumulative hike of another 50 basis points in the next two policy announcements," the Barclays Capital report titled Global Economics Weekly said.

On May 3, the Reserve Bank had raised its short-term lending (repo) rate by 50 basis points to 7.25 per cent and increased the saving bank rate by 50 basis points to 4 per cent to give higher returns to depositors in the wake of high inflation, which is eating into their savings.

However, Barclays Capital, the investment banking division of Barclays Bank, believes that increasing key rates will not do the needful.

"Inflation might not be influenced meaningfully by this rate increase alone, especially as persisting price pressures for agro commodities, metals and energy prices can potentially add to further spill over of inflation risks," the report said.

Despite a markedly favourable base effect, the headline inflation for April was at 8.7 per cent year-on-year, suggesting the persisting inflationary pressures in the country, the report said.

Food inflation is softening in "baby-steps" from its peak in December/January, while non-food manufacturing inflation is still hovering around 7 per cent year-on-year.

Fuel inflation has remained high and still rising. The risks of a further increase in energy price inflation are also strong in the coming months.

Domestic petrol prices last week were raised by Rs 5/litre.

Though impact of petrol price hike will be limited on the headline number, likely upward revisions to prices for other petroleum products (particularly diesel) could place upward pressure on headline inflation, the report said.

High inflation and the likely aggressive tightening could potentially affect manufacturing and construction activities the most.

Though the latest Index of industrial production ( IIP) data for March came at 7.3 per cent on annual basis - "way above expectations" - it is far from clear yet whether IP will be able to break the jinx of consistent low-single digit in the coming months," the report said.