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LATEST NEWS UPDATES | Cheaper food keeps inflation down at 8.58%

Cheaper food keeps inflation down at 8.58%

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published Published on Nov 15, 2010   modified Modified on Nov 15, 2010

Inflation declined marginally to a 10-month low of 8.58% in October, prompting policymakers to proclaim victory in their effort to cool prices, but economists remained sceptical saying the fight is far from over.

The decline was mainly due a fall in food inflation to 14.13% from 15.71% in September and the base effect, or higher inflation of last year, data released on Monday showed.

Finance Minister Pranab Mukherjee said the full impact of the rate hikes earlier this year was yet to play out and he expected headline inflation to fall to 6% by March. He said inflation will ease to 6% by March.

Economists said the easing of inflationary pressures will provide some comfort to RBI. However, they see monetary tightening resuming soon because of indications that inflation was becoming structural.

“With commodity pressure going up, there will be a pick-up in monthly momentum . But the headline inflation will come down purely because of the base effect,” said Sonal Varma, economist with Nomura India . She said the central bank will start lifting rates again from next year.

Industrial growth dropped to a 17-month low of 4.4% in September, creating concerns that rate increase will slow down economic activity further.

The RBI has lifted its key policy rates five times this year -- repo (lending) rate by 150 basis points and the reverse repo (borrowing ) rate by 200 basis points. The hikes have begun to spill over into higher lending rates. With the industrial growth moderating sharply, it is widely expected that the RBI will pause for a while, a perception further reinforced by one of the deputy governors who said the decline in industrial growth was worrisome.

The bond markets were not impacted by the data, indicating that market expectation of a status quo in the central bank’s December 16 review remained unaltered.

Inflation figure for August was revised up to 8.82% from 8.5% earlier, underscoring the sticky nature of inflation. Inflation in manufactured products rose to 4.75% in October from 4.59% in September.

“We have to differentiate between the level of prices and rate of inflation,” said Madan Sabnavis, chief economist at Care ratings. The wholesale price index rose 0.4% from the previous month, driven by an increase in every category, indicating a firm trend in prices. Citi economist Rohini Maklani expects a difficult time for the central bank because of the high underlying inflationary pressure.

“... soft growth numbers and still-firm prices could once again put the RBI in the growth vs inflation dilemma ,” she said in a research note. Senior officials with the government, however, reflected the optimistic tone of the finance minister. “We hope it will come down to 6.5% by December-end and close to 5.5% by March, 2011,” said C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council


The Economic Times, 16 November, 2010, http://economictimes.indiatimes.com/news/economy/indicators/Cheaper-food-keeps-inflation-down-at-858/articleshow/6933278.cms


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