Indian food price inflation snapped a three-week easing trend in late March and cost pressures dragged down the pace of manufacturing growth, reinforcing expectations for a second interest rate increase in as many months later in April. Government data also showed the fuel price index continued to rise, adding more pressure to headline inflation that is on track to cross into double digits in March and which could further contribute to an uptick in manufacturing inflation.
Prime Minister Manmohan Singh on Thursday called for bringing inflation in check and said the country needs to maintain its cautious approach on freeing capital account. "It's (the Reserve Bank of India's) task is made easier by the fact the capital account is not entirely open and there are restrictions on the inflow of debt, particularly short-term debt," Singh told a conference in Mumbai to mark the central bank's platinum jubilee celebrations.
India's four-month spell of wholesale price inflation above the RBI's perceived comfort zone of 5 percent prompted the central bank in March to unexpectedly hike its key lending rates by 25 basis points. The central bank last month warned of inflationary pressures from higher capacity utilisation and rising commodity and energy costs.
That assessment was validated on Thursday by the HSBC Markit Purchasing Managers' Index, which fell to 57.8 in March from 58.5 in February as mounting cost pressures took a toll on output expansion. Analysts expect another interest rate hike when the bank reviews policy on April 20, with the central bank's focus firmly on anchoring inflationary expectations as stronger signs emerge the economy is on a steady growth path.
The food price index rose an annual 16.35 percent in the 12 months to March 20, above the previous week's reading of 16.22 percent. Fuel inflation rose 12.75 percent in the same period from the previous week's 12.68 percent rise. High food prices have put on hold government plans to cut its food subsidy bill and trim the fiscal deficit by raising prices of subsidised food grains for welfare schemes, an unpopular step when inflation remains high.
Singh on Thursday said the fiscal deficit had to be brought down for a monetary policy that would simultaneously contain inflation and support growth. India's fiscal deficit is projected at 5.5 percent of the GDP in the financial year that began on April 1 and the government has committed to bring this down to 4.1 percent by 2012/13. Separately, data showed February exports rose an annual 34.8 percent to $16.09 billion, the fourth straight rise, a further sign of a strengthening economy. Imports rose 66.4 percent to $25.06 billion in the same period.