India's headline annual inflation rate neared 5 percent in mid-August, data showed on Friday, and the government said it was trying to keep the rate below that level in the financial year ending March 2007.
But analysts said costlier oil and upward pressure on prices of primary products like food may push inflation to the top of or even above the central bank's 5.0-5.5 percent estimate of where wholesale price inflation will be at the end of the fiscal year next March.
The widely-watched wholesale price index rose 4.92 percent in the 12 months to August 12, higher than forecast and above the previous week's annual rate of 4.82 percent due to an increase in food and manufactured product prices.
"Globally inflation is on the rise and the pass-through effect of high crude prices is not yet complete," said S.P. Prabhu, chief economist, IDBI Capital. "So we see inflation being a concern for the rest of the year and higher than the (central bank's) 5.0-5.5 percent range by the close of the year."
The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it has a higher number of products in its basket and is published weekly. The government has taken steps to curb price rises, including cutting the import duty on wheat, and the Reserve Bank of India raised interest rates in June and July to keep inflation down.
"My effort is to control inflation below 5.0 percent," Finance Minister Palaniappan Chidambaram told reporters. The Reserve Bank of India (RBI) raised its main short-term rate by 25 basis points to 6.0 percent on July 25, its second increase in six weeks, as it stepped up its fight against mounting price pressures in the fast-growing economy.
Chidambaram said the authorities were trying to ensure adequate liquidity in the financial system in the face of rising borrowing costs at home and abroad. "Hardening of global interest rates is not in our control. What we are doing is to ensure ample liquidity so that the impact of hardening interest rates is softened," he said. A finance ministry quarterly review of the economy released on Friday said the government was hopeful of maintaining fiscal discipline this financial year despite high crude oil prices and higher global interest rates.
India, which imports 70 percent of its oil, raised petrol and diesel prices in June to bring them more into line with rising oil prices abroad and analysts expect it to make another round of increases some time in the next few months.
Prime Minister Manmohan Singh, architect of economic reforms in the early 1990s, has said there is a limit to how much the government can subsidise consumption of petroleum products in the face of rising import costs.
The finance ministry review said the outlook for the economy was positive. It said the government expected to meet its fiscal deficit target of 3.8 percent in the year ending March 2007, down from 4.1 percent in the previous year.
The economy, Asia's fourth largest, grew 8.4 percent in the fiscal year to March 2006 and the central bank expects it to expand by 7.5-8.0 percent in the current fiscal year.
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