Indian inflation eased for the second consecutive week in late-August as food prices fell, but economists saw no let up in the central bank's tight policy stance as underlying demand pressures remained intact. The annual wholesale prices index, India's most widely watched price measure, rose 12.34 percent in the 12 months to August 23, below the previous week's 12.40 percent rise and a median forecast of 12.44 percent in a Reuters poll.
It hit 12.63 percent in early August, its highest since annual numbers in the current series became available in 1995. Trade Minister Kamal Nath said the government's supply-side measures had begun to take effect and inflation should soften from current levels, but economists maintained they expected it to peak at 13-14 percent by end-December. "Overall, we expect monetary policy to stay tight as underlying demand pressures still lurk which may lead to higher inflation," said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.
In its 2007/08 annual report last week, the central bank said it would tackle strong demand pressures as inflation has hardened beyond tolerable levels and the immediate challenge was to bring inflation down to a tolerable level.
The bank expects inflation of around 7 percent at end-March. Rupa Rege Nitsure, chief economist at Bank of Baroda, said inflation should stay in double-digits until December, and added the true direction of the index would only become clear after summer crops were harvested.
Markets closed before the data was released, but expectations of a lower inflation reading pushed yields down. The 10-year benchmark bond yield ended at 8.47 percent, its lowest since June 19 and 14 basis points below Tuesday's close of 8.61 percent.
The benchmark stock fell 1 percent while the rupee ended at 44.35/36 per dollar, a shade stronger than 44.38/39 at Tuesday's close. Financial markets were closed on Wednesday for a religious holiday. Inflation has soared largely due to surging prices of food and oil, prompting a series of fiscal and monetary steps by the government and central bank.
The Reserve Bank of India lifted its main lending rate three times in June and July, taking the repo rate to a seven-year high of 9 percent and has repeatedly raised banks' reserve requirements.
Earlier this week the federal government named Finance Secretary Duvvuri Subbarao as the new governor of the central bank, replacing Yaga Venugopal Reddy, whose terms ends on Friday. Analysts said the new central bank chief is likely to continue his predecessor's hawkish stance on inflation as authorities race against time to calm inflation before key state elections later this year and federal polls in 2009. The inflation reading for the week ending June 28 was revised up to 12.03 percent from 11.89 percent, a smaller upward adjustment than in previous weeks.
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