Rating agency Crisil has revised its inflation forecast for the fiscal 2004-05 to an average of 5.5-6.0 per cent as against its initial assessment of average inflation at 5.5 per cent.Two critical factors that could harden the inflation are international crude prices and monsoon performance. ‘‘International crude prices show no signs of softening. And, some of the damage to crops from rainfall deficiency in some parts of the country cannot be undone even after the revival of the monsoons during August,’’ Crisil said in its recent report titled ‘Outlook on Indian Economy’.However, with the slowdown of the Chinese economy, global commodity prices are expected to soften and this will ease inflation in some of the commodities in the manufacturing segment. With the cut in customs and excise duties on petroleum products, the domestic oil prices will be kept under check. In addition to all this, the base effect will come into play from September onwards and will lead to some softening in the inflation rate, the report said.Interest rates too are on the way up and may continue in the coming quarters due to the firming of interest rates in the US, rising demand for domestic credit and firming inflation, the report said, adding that the potential fiscal deficit is to be higher than 5 per cent of GDP due to higher government expenditure. With the downward revision of GDP, fiscal deficit as a percentage of GDP is expected to be higher than 5 per cent. Higher interest rates will slow the growth in sectors that have been driven by retail financing. Higher interest rates will also increase the interest liability of the borrowers, including the government and the corporate sector.
