Inflation has peaked out further downside seen Govt (17-Aug-2010)
The Chief Economic Advisor to the finance ministry Kausik Basu said on Tuesday that the headline inflation in the country had peaked out following the marginal dip seen in July and should come down sharply in coming months. Data released by the government showed earlier in the day that the wholesale price (WPI) based inflation had come down into single digits after five months at 9.97%.
Some other policy makers also held similar opinion. Saumitra Chaudhuri, member of the Planning Commission in charge of economic development, also said that inflation data indicated peaking out of the headline inflation, and waning of the low base effect from last year will translate into further slowdown in pace of price increase in coming months.
India's persistently high headline inflation has been a major political headache for the government. Further, the inflation has shown signals of widening into broader economy from hitherto being restricted to food and other primary commodities. Economists had already been saying that food inflation could drive up inflationary expectations and generalise into broader economy through wage inflation.
The government on the other hand has been hoping that the good monsoon rains this season will produce a strong harvest that should cool soaring food prices, a development that will not only help curb headline inflation but also help the monetary authority anchor inflationary expectations.
However, saying that inflation has peaked, might be too early according to some analysts. Increase in the headline index on a month-on-month basis, a sharp upward revision of May's inflation reading and only a marginal decline in manufacturing inflation suggest price pressures continue to persist in the Indian economy.
This will translate into further tightening of the monetary policy by the central bank. The Reserve Bank of India (RBI) has already hiked policy rates twice last month by 25 basis points each time and another similar hike is on the cards in the forthcoming mid-quarter review on September 16. While this will put some brakes on strong growth momentum seen in recent quarters, such an action is certainly advisable till new capacities start coming up.
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