Indian Inflation at 7.61%, 3-½ Year High

Indian annual inflation rose to a 3-½ year high of 7.61 percent in late April, prompting the finance minister to pledge that the government would take more action to tame prices if needed. Wholesale inflation (WPI), the country's most closely followed measure of price trends, has more than doubled since November as India, like other countries globally, saw its import bill for oil and food prices soar.

In the latest reported week, though, inflation has not shown any significant spurt as compared to earlier week (7.57%), actual inflation estimates could be much higher. The consistent upward revisions in the final inflation numbers by the Government since end-January have been fuelling speculation that actual inflation estimates, which come in with a lag, will be way above what the provisional figures suggest. The gap between the provisional and final figures widened to 110 basis points for the week ended March 1 the latest week where final data has been made available. Since the provisional wholesale inflation data comes out first, it effectively emerges as the most closely followed measure of price trends in the country, while the final numbers, by virtue of being backdated, pretty much go unnoticed.

The fiscal and trade measures taken by the government should start having an impact in the coming weeks. Particularly the cut in steel prices announced by steel producers should reflect in the index. The government is in the process of persuading the cement companies to roll back prices and expects inflation to moderate once the various measures kicked in.

The central bank has also stepped in to try to control price rises, however there is a limit to what it can do, largely because inflation stems from supply constraints not domestic demand. Last month, the Reserve Bank of India (RBI) announced a 25-basis-point increase in the cash reserve ratio (CRR) to 8.25 percent, its highest level in seven years.

Recent moves by the government and the central bank to boost supplies and curb inflation would pay off but not immediately. With oil prices still firm, we expect the WPI index to remain above 7 percent in the coming weeks.