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Economy Jun 14, 2012

Food, fuel prices likely to drive inflation to 7.5 percent: Poll

India's inflation may have accelerated at its fastest pace this year in May, driven by higher food and fuel prices, impeding chances of a rate cut by the RBI at its review next week, a poll showed.

The wholesale price index, India's main inflation gauge, is expected to rise 7.60 percent in May versus a year ago, compared with April's 7.23 percent, the poll of 31 analysts showed.

Forecasts ranged from 7 percent to 8.53 percent. The poll median at 7.6 percent is the highest since December, when prices rose 7.74 percent.

Food and fuel has kept the inflation number stubbornly high. AFP

Thursday's inflation number will be the last economic data release before the Reserve Bank of India's rate review on June 18 and will be keenly watched for cues on the outcome of the meeting, especially with economic growth at a 9-year low.

"The RBI is facing a dilemma in terms of managing growth versus inflation," said Arun Singh, senior economist at Dun & Bradstreet. "With inflation staying elevated and with the presence of major upside risks to it, the RBI might hold rates at this point of time and start cutting them from July onwards."

The RBI surprised markets by cutting its benchmark repurchase rate by a larger-than-expected 50 basis points at its last meeting in April. The move was to boost economic growth from a nine-year low reported in the March quarter and was supported by the average inflation rate in the first three months slipping below 7 percent.

A pick-up in the inflation rate may well weaken the case for further policy easing that the industries are crying out for. Industrial output growth was almost flat in April, well below expectations of a 1.7 percent growth, government data showed on Tuesday, adding to the central bank's dilemma.

A separate poll last week showed the RBI is expected to cut its repo rate by at least 25 basis points from the current 8 percent on June 18. Primary articles -which includes food-and fuel, make up over a third of the wholesale price index and elevated prices in these segments has kept the inflation number stubbornly high.

The prolonged weakness in the Indian rupee may have added to the pressure, with its 6 percent drop this year pushing costs of imports, mainly crude oil, higher. "There's not much reason to expect headline inflation to come down over the rest of this year. Given what's been going on in commodity markets, there is no room for the Indian government to reduce the prices of fuel," said Andrew Kenningham, a senior economist at Capital Economics in London.

In fact, high prices of international crude oil along with a depreciating rupee, forced the government to raise pump prices of petrol last month by about 10 percent, its steepest. Although petrol prices were partially rolled back there after, the extra fuel bill is likely to stoke inflation higher and hurt consumers' pockets.

Still, the headline inflation rate is much slower than the 9.52 percent average through 2010 and 2011 which prompted aggressive policy tightening between early 2010 and October last year.

Even with international crude oil prices slipping in May below the $100 per barrel mark, analysts say its benefits have not passed on to consumers due to the rupee's depreciation and regulated prices of petroleum products in the country, keeping consumer prices relatively high.

Reuters

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