March inflation above f8217;cast at 6.89

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Despite high prices of food items,the annual rate of inflation moderated to 6.89 per cent in March,from 6.95 per cent in February. It was 9.68 per cent a year ago.

8220;8230;food inflation in the month of March has increased,which is disturbing factor. I do hope in course of time it will moderate,8221; Mukherjee told reporters.

Pointing out that it would have been more comfortable had the inflation been closer to 6.5 per cent,he said,8221;we shall have to be alert on it8230;Of course,the supply side constraint substantially effect food inflation. We will be addressing that.8221;

As per the Wholesale Price Index WPI,inflation of food items rose sharply to 9.94 per cent in March,as against 6.07 per cent in February. Food articles have 14.3 per cent share in the WPI basket. Vegetable prices in March shot up to 30.57 per cent,from 1.52 per cent in February.

However,inflation of the manufactured goods showed some moderation to 4.87 per cent,from 5.75 per cent in February. Experts attributed easing in the manufacturing sector inflation to high base of last year,when it was 7.45 per cent in March 2011.

8220;Notwithstanding concerns related to suppressed inflation and elevated global crude oil prices,the RBI is expected to reduce the repo rate and CRR by 25 basis points each in the upcoming policy review,ICRA Economist Aditi Nayar said.

Inflation,as measured by the Wholesale Price Index WPI,remained high for most part of 2011,and RBI had hiked interest rates 13 times to tame the price rise.

Making more money available for lending,the central bank has already cut the CRR,the portion of deposits banks have to keep with the Reserve Bank,by 125 basis points since late January to 4.75 per cent.

The challenge before RBI is to arrest the decline in growth,which slipped to three-year low of 6.9 per cent in 2011-12. The government expects the GDP growth to accelerate to 7.6 per cent in 2012-13,although the Asian Development bank ADB has pegged it at 7 per cent.

As per the data,inflation in overall primary articles rose sharply to 9.62 per cent in March,from 6.28 per cent in February.

During the month,milk became expensive by 15.29 per cent,while rice and cereals turned costlier by 4.73 per cent and 4.41 per cent respectively. Prices of potato too rose by 11.60 per cent.

Prices of eggs,meat and fish prices rose 17.71 per cent.

The rate of price rise was lower than 20 per cent in February. Besides,onion prices declined by -24.23 per cent in March. The rate of decline was -48.50 per cent in February.

The headline inflation number for January was revised upwards to 6.89 per cent,up from the provisional estimate of 6.55 per cent.

In manufactured items,inflation has been high since February 2011,when it crossed the 6 per cent mark.

Year-on-year,among manufactured items,iron grew dearer by 17.18 per cent and edible oil prices rose by 9.78 per cent.

Inflation in tobacco products and basic metals was 8.22 per cent and 9.51 per cent respectively.

Prices of non-food primary articles,which include fibres and oilseeds,were lower at -1.20 per cent in March. In February,their rate of price rise was -2.56 per cent.

Inflation in the fuel and power segment was 10.41 per cent on an annual basis. It was 12.83 per cent in February.

Experts said the inflationary pressure,driven by prices of food articles,will keep the pressure on the government to remove supply side bottlenecks.

8220;Food prices have become a big challenge for the central bank as well. Still RBI may cut both key interest rates repo and CRR by 25 basis points 0.25 per cent in its annual credit policy tomorrow,8221; Bank of Baroda Chief Economist Rupa Rege-Nitsure said.

COMMENTARY:

SHUBHADA RAO,CHIEF ECONOMIST,YES BANK,MUMBAI

Growth is slowing down and inflation has not dramatically come down. Market8217;s expectation is tailored towards a rate cut. But RBI will continue to maintain hawkish tone given the inflation expectation.

In the coming months,primary and fuel inflation will continue to inch higher,because of seasonality and in fuel because of incomplete adjustment in prices. But having said so,core inflation has come below 5 percent and is unlikely to see a sharp upward trajectory in the coming months.

We believe the quantum of rate cuts through the year would be 50-75 basis points. The rate cuts need to be front loaded,probably in the first half of the fiscal year,to get a multiplier effect on economy. As early as tomorrow,we will see 25 bps rate cut.

KUMAR RACHAPUDI,FIXED-INCOME STRATEGIST,BARCLAYS CAPITAL,SINGAPORE

I think the lower manufacturing inflation print will give comfort for the RBI to deliver a 25 bps rate cut tomorrow,but the higher food inflation will play a part in determining RBI8217;s rhetoric.

We expect RBI8217;s statement to be slightly on the hawkish side,highlighting suppressed price pressures on inflation. But at the same time,the policy document will also highlight growth risks both domestically and globally. I think markets will wait for RBI8217;s policy before making a decisive move.

UPASNA BHARDWAJ,ECONOMIST,ING VYSYA,MUMBAI

A sub-5 percent core inflation further affirms the view that RBI would consider easing its monetary policy stance by 25 bps tomorrow.

Since the reduction in the manufacturing component has largely been driven by base effect and upside risks to inflation remain,we expect RBI to sound cautious in tomorrow8217;s meeting despite the rate cut.

VIVEK RAJPAL,INDIA RATE STRATEGIST,NOMURA,MUMBAI

With core inflation below 5 percent,the possibility of a 25 bps rate cut on Tuesday remains a high probability,but the RBI might appear cautious on inflation trajectory,given the pressures that are building up in food inflation. We,however,still see total rate cuts of 75 bps by December 2012.

SUJAN HAJRA,CHIEF ECONOMIST,ANAND RATHI SECURITIES,MUMBAI

We believe the RBI will go ahead with a 25 bps rate cut on Tuesday,as it is the only opportunity they will get for monetary easing in the near future.

Inflation is expected to go up from April due to higher food prices,increase in railway freight charges and higher oil prices.

NITESH RANJAN,CHIEF ECONOMIST,UNION BANK,MUMBAI

The positive aspect of today8217;s number is core inflation at 4.7 percent,lower than what we were expecting and it is also declining on sequential month basis. This is a sign of declining demand and receding pricing power. We hold the view that RBI will cut the policy repo rate by at least 25 basis points on April 17.

RUPA REGE NITSURE,CHIEF ECONOMIST,BANK OF BARODA,MUMBAI

The inflation number does not reflect the true inflationary picture. Inflation is still suppressed in the fuel components. However,we are seeing the effects of that in high market borrowing,and elevated interest rates.

Though the Reserve Bank of India is under tremendous pressure to cut interest rates,the pace of easing would be very modest.

On Tuesday,I expect the RBI to cut the repo rate by 25 basis points,and also the cash reserve ratio by 25 basis points because that will be balanced action. Liquidity is still under pressure and with a repo rate cut,banks will have to transmit the easing in policy rates.

INDRANIL PAN,CHIEF ECONOMIST,KOTAK MAHINDRA BANK,MUMBAI

Inflation was above our estimate of 6.5 percent. But we think RBI will bite the bullet and cut the repo rate by 25 bps as it also needs to nudge up growth a little or more to sustain the nascent recovery trends. However,we remain slightly hesitant of calling for aggressive rate movements by the RBI and the incremental pace of change will depend on the inflationary dynamics.

Inflation risks are likely to continue as we expect the currency to be on a depreciation bias 8211; with European risks of debt coming to the fore again.

A PRASANNA,ECONOMIST,ICICI SECURITIES PRIMARY DEALERSHIP,MUMBAI

Headline number looks bad,but manufacturing is below our expectation which means that the problem is on the primary articles side.

For the RBI what should really matter is the manufacturing number as policy rates act on the demand side,so we think RBI will cut rates. But they will remain cautious in whole of 2012/13 as broadly we expect headline inflation to be at 7 percent given high food prices and core inflation at 6 percent.

MARKET REACTION:

The 10-year benchmark bond yield and the key overnight indexed swap rates were little changed as core inflation showed sign of easing,keeping rate cut hopes alive.

BACKGROUND:

8211; The Reserve Bank of India is widely expected to cut its repo rate for the first time in three years on Tuesday in an attempt to lift sagging economic growth,even as high oil and food prices remain a challenge to managing inflation.

8211; High food inflation is likely to pinch Indians at least until July as fruit and vegetable output shrinks,while edible oil and pulses prices are rallying on lower production and a more expensive world market.

8211; Industrial production grew at a slower-than-expected pace in February,weighed down by a contraction in output of consumer durable goods.

8211; Car sales in India rose just 2.2 percent in the fiscal year ended March,on high interest rates and rising fuel costs,but are seen posting double-digit growth this year.

8211; India8217;s trade deficit is seen widening to 185 billion in the 2011/12 fiscal year on higher crude import bill,which may worsen the country8217;s current account balance and further weaken the rupee.

8211; Indian services sector growth slipped to a five-month low in March as optimism about the business outlook in the coming year faded to its weakest level since 2009.

8211; Economic growth slowed to 6.1 percent in the three months to December. The government has forecast growth in the fiscal year that ended on March 31 to dip below 7 percent for the first time in three years.