Inflation at 8.98% in March

Inflation in March rose to 8.98 per cent, overshooting the projections of both the finance ministry and the Reserve Bank of India (RBI). Though food inflation saw a decline, the rise in prices of manufactured products and a few fuel items contributed to the rise in inflation.

RBI had pegged inflation for March at around 8 per cent, while the finance ministry estimated it at 7-7.5 per cent. Wholesale price-based inflation in February stood at 8.31 per cent.

Inflation in January was revised to 9.35 per cent from 8.31 per cent estimated provisionally. The numbers for March too, may be revised to close to double digits. The rise in inflation was despite the high base effect of 10.23 per cent a year ago. This may prompt RBI to raise policy rates further in its annual policy for 2011-12, which is slated for May 3.

Monetary policy now has a greater role to play in tempering demand, compared to earlier periods when food inflation was on the rise. Fiscal policies would have to accompany monetary policy to augment supply and reduce inflation.

“Inflation has been a concern. It has not come under control as much as I had hoped. There is a need to use fiscal and monetary policy to get rid of supply constraints, wherever they exist,” said Planning Commission Deputy Chairman, Montek Singh Ahluwalia.

Coupled with weak Infosys quarterly results, the high inflation numbers also led to a 310-point decline in the benchmark Sensex, which closed at 19,386.82 points today.

Food inflation, a major concern in India till early this year, came down to 9.47 per cent in March from 10.65 per cent in February. Food inflation fell to a year’s low of 8.28 per cent for the week ended April 2, against 9.18 per cent a week ago.

In March, inflation for manufactured goods rose to 6.21 per cent from 4.94 per cent in February and 5.19 per cent in January. Core inflation (manufactured products sans processed food products) rose to a two-and-a-half year high of 7.08 per cent, compared with 6.10 per cent in the previous month.

Rising inflation should also be seen in the context of International Monetary Fund’s recent warning to emerging markets against overheating of their economies.

YES Bank chief economist Shubhada Rao said, “Slowing investment and rising demand (as manifested by industrial growth numbers) is a recipe for overheating. If we do not address the supply-demand gaps quickly, inflationary pressures will continue to build.”

High inflation is not a problem in India alone. In China, inflation rose to a 32-month high of 5.4 per cent in March. However, headline inflation is calculated on the basis of consumer prices in China, while it is based on wholesale prices in India.

“For 2011-12, while we see a moderation in average inflation to 8 per cent from 9.5 per cent in 2010-11, core inflation, on an average, is likely to be higher at around 6 per cent, compared with 5.6 per cent in 2010-11,” said Shubhada Rao.