Inflation jumps, industry output picks up
Saturday, 12 April 2008

REUTERS, NEW DELHI - Inflation jumped to its highest in more than three years and industrial output growth picked up, increasing the odds of the central bank tightening policy, although analysts are divided on how it would do it.

People buy vegetables from roadside stalls in Mumbai April 9, 2008. Inflation jumped to its highest in more than three years and industrial output growth picked up, increasing the odds of the central bank tightening policy, although analysts are divided on how it would do Annual wholesale price inflation spiked to 7.41 percent as at March 29, up sharply from 7.0 percent a week earlier and the highest since Nov. 2004, data showed on Friday, sending bond yields to nine-month highs.

Industrial production grew 8.6 percent in February from a year earlier, coming above January's upwardly revised 5.8 percent rise and a market forecast of 7.9 percent, easing some concerns about the extent of a slowdown in the broader economy.

With signs of growth losing some momentum and surging inflation largely driven by supply-side constraints, economists have been saying the central bank's options were limited ahead of its next policy review on April 29. But Friday's numbers may spur the authorities into action, some analysts said.

"The data tells us that we are having a moderation in economic activity as opposed to a sharp slowdown and the central bank has room to take policy action," said Tushar Poddar, economist at Goldman Sachs in Mumbai.

The government, concerned about the political fallout of rising costs of living ahead of state and national polls this year and next, has taken a series of fiscal steps to curb prices.

In late March it scrapped import duties on most edible oils and banned exports of non-basmati rice. Trade Minister Kamal Nath said after Friday's inflation figures the government would do more, including banning cement exports soon. "We will take more steps to contain inflation. We will discuss it," Nath told reporters.

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The 10-year government bond yield hit 8.05 percent for the first time since July after the data as speculation the central bank will tighten policy intensified. It had ended at 7.98 percent on Thursday.

The partially convertible rupee was largely steady at 39.9300/9400 per dollar but the main share index dipped into the red before recovering to stand 1 percent up.

The Reserve Bank of India (RBI) raised its short-term interest rates five times between June 2006 and March 2007, and has since kept its key lending rate at 7.75 percent. It has also raised its cash reserve ratio (CRR), the proportion of funds banks must keep with it on deposit, by 250 basis points since December 2006 to absorb inflation-fuelling excess cash.

Some economists said a rebound in industrial output would encourage the central bank to tighten policy again to curb prices. But they said it will raise the reserve ratio rather than lift interest rates when growth this fiscal year is expected to slow to about 8 percent from an estimated 8.7 percent in the year which ended on March 31.

"The implication of this is that the probability of RBI increasing CRR has now increased," Saugata Bhattacharya, economist at Axis Bank, said. Others, however, saw room for a rate rise, and another school of thought was for the central bank to just remove excess cash through market stabilisation bonds, which are used to mop up funds released by currency intervention to curb rupee gains.

"If you look at the headwinds, they are just getting stronger," said Standard Chartered Bank economist Shuchita Mehta, who sees growth dropping to 7.4 percent this fiscal year. Manufacturing production rose 8.6 percent in February from a year earlier, compared with a revised 6.3 percent in January.

The strongest growth was in consumer non-durables, such as soaps and toothpaste, which rose 11.0 percent from February a year ago, while capital goods grew 10.4 percent on the year.

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