Rising Indian inflation confounds forecasts

Rising Indian inflation confounds forecasts

By James Lamont in New Delhi

Published: March 14 2011 13:48 | Last updated: March 14 2011 13:48

India’s headline inflation rose in February, increasing the likelihood of the country’s central bank raising lending rates later this week and threatening to wreak havoc with optimistic government forecasts.

Figures released on Monday showed that the wholesale price index had edged up to a year-on-year rate of 8.31 per cent last month compared with 8.23 per cent in January. The data overturned many forecasts by economists who had expected inflation to fall last month.

Stubbornly high inflation, fuelled by food prices and now rising energy prices, has thwarted the best efforts of the Congress party-led government to relieve price pressures on consumers.

After missing forecasts aimed at the end of last calendar year, it has pledged to reduce inflation to below 7 per cent by the end of this month.

“It seems quite obvious now that inflation is not going to decelerate as fast as policy makers were hoping for and the 7 per cent end target is no longer within reach,” said Leif Lybecker Eskesen, chief economist for India at HSBC, the banking group.Indian inflation

“We are going to see inflation this year well-above RBI’s comfort zone.”

Rising food prices have for months been a big concern in India’s fast-growing economy. Economists and industrialists have expressed fears that food inflation is beginning to spill into more general price pressure.

In February, price pressure came from a rise in non-food manufactured products, which rose 4.9 per cent compared to 3.8 per cent in January.

Food inflation eased to 10.65 per cent in February, from 15.7 per cent the previous month. Fuel and power prices rose 11 per cent during the period.

India suffers the highest inflation of any major Asian economy. The Reserve Bank of India has raised interest rates seven times over the past year in a bid to cool rising prices while maintaining an economic growth rate of 8.5 per cent.

While some senior policymakers insist that India needs to return quickly to targets of modest inflation – nearer 3.5 per cent - others appear more comfortable that the country can live with high inflation so long as it is recording high levels of growth .

Pranab Mukherjee, the finance minister, expressed confidence on Monday that the government would still reach its inflation target for the end of the fiscal year.

Economists are not so sure. Rohini Malkani, economist for Citibank, the US banking group, in Mumbai, said high food prices and risks surrounding the supply of oil from the Middle East would lead to inflation between 7 per cent and 7.5 per cent throughout the coming fiscal year.

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