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Inflation battle may go nowhere

The central government and the Reserve Bank of India are fighting a losing battle against inflation, as both fiscal as well as monetary measures

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MUMBAI: The central government and the Reserve Bank of India are fighting a losing battle against inflation, as both fiscal as well as monetary measures are unlikely to have much of an impact, at least in the short term, according to the Hongkong and Shanghai Banking Corporation (HSBC).

“Inflation is largely commodity driven because of a 60% risen oil, metal and food prices and we don’t see a quick correction. WPI is headed higher. It may go to 8% shortly and will stay in the 7-8% range until the middle of 2009,” Robert Prior-Wandesforde, HSBC’s chief Indian economist, told reporters in Mumbai on Wednesday.

HSBC is predicting higher inflation assuming that there is no further rise in the commodity prices. If global commodity prices continue to rise, there is a strong possibility wholesale inflation may hit double digits, Wandesforde said.

Wholesale price inflation rose to a three-year high of 7% last Friday. However, the consumer price index hasn’t risen as sharply and was recorded at 5.47% in February. But Wandesforde said that will change soon.

“CPI hasn’t moved yet, but it is going to rise sharply. Primary articles in the WPI have risen 10%, which historically means that CPI will also hit 9-10% in a fairly short span of time,” he said.

Authorites, however, can’t do much. “Unfortunately there will be no turnaround in growth or inflation until the second half of 2009. RBI’s ability to control WPI when it is driven by commodity prices is nil. Interest rates have zero impact on commodity prices. For rates to influence inflation it will take a long, and will impact well after election. May be 2-3 years,” he said.

HSBC has predicted for growth to slow to 7% in 2008-09, which may improve towards 8% in 2009-10.

Wandesforde said that unlike in the second half of 2006, when signs of overheating led the RBI to tighten policy rates, the central bank faced no such pressures this time.

“The only thing is that the RBI is to be seen to be doing something. But even the correlation between the WPI and repo and reverse repo rates is negative, so may be the RBI will look through the WPI numbers and put the ball in the government’s court,” he said.

However, the Singapore-based economist said that even fiscal measures like duty cuts from the government won’t cut inflation by more than 10 basis points. He argues that allowing the rupee to rise is the best alternative for the government in the present circumstances.

“I am puzzled as to why the government can’t allow rupee appreciation, because it is an inexpensive way to solve the problems they are into. But may be they are worried about hurting growth which is also important,” he said. HSBC’s calculation show that a 10% rise in the rupee cuts WPI inflation by 1%.

HSBC does not expect the RBI to hike repo, reverse repo rates or cash reserve ratio (CRR). “It will be a trade off between growth and inflation. A 50 basis points CRR hike is possible though it is not central to our theme,” Wandesforde said.

r_joel@dnaindia.net

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