News: Inflation has peaked: PMs Economic advisor

SIVASIVA (FCA, Future CA) (4935 Points)

17 August 2010

17 Aug, 2010, 07.31PM IST,REUTERS

Inflation has peaked: PM's Economic advisor

NEW DELHI: India's headline inflation has peaked helped by better food output as well as policy intervention and will ease faster from September as the base effect kicks in, a senior policy adviser said on Tuesday.

India's wholesale price index (WPI) rose an annual 9.97 percent in July, slower than analysts' expectations, as food inflation eased, government data showed on Monday.

"Inflation has peaked. There is no issue about it," Saumitra Chaudhuri, the Planning Commission member in charge of economic development, told Reuters in an interview.

"Food inflation peaked between January and March and manufactured goods inflation has also peaked ... I think we have got it (under control)."

Headline inflation in August will be similar to the July figure, he said.

India's headline inflation, the highest amongst the G20 major economies, is a major political headache for the Congress party-led government. The country has witnessed street protests and the opposition had shut down parliament protesting what it called government's lack of ability to control prices.

The government hopes that good monsoon rains will produce a strong harvest that should cool soaring food prices this year, which will curb headline inflation as well.

Chaudhuri, who is also an economic adviser to Prime Minister Manmohan Singh, said he expected inflation to ease to 6.5 percent by March 2011.

In response to the high inflation, the Reserve Bank of India has raised its main lending rate four times since March by a total of 100 basis points and has said that the balance of policy has shifted to contain inflation.

Although annual headline inflation in July slowed more sharply than expected to single digits, analysts say the central bank is unlikely to take the foot off the pedal on rate rises as it worries about broader price pressures.

Analysts say month-on-month increases in prices, a sharp upward revision of May's readings and a marginal decline in manufacturing inflation suggest price pressures remain in Asia's third-largest economy. Analysts expect the Reserve Bank of India (RBI) to raise rates to rein in demand until new capacities come on stream, with another hike of at least 25 basis points seen at a review on Sept. 16.

Last week, a Reserve Bank deputy governor said that monetary policy action taken by the central bank should have an impact on inflation over the next 6 to 12 months.

"There are capacity constraints in certain areas ... (but) in the manufacturing sector it's not a very major issue," Chaudhuri said.

India's industrial output rose an annual 7.1 percent in June, its slowest pace in 13 months, which experts say points to capacity constraints in the economy.

Last month the RBI revised up its headline inflation forecast to 6 percent by the end of the fiscal year in March 2011 from 5.5 percent earlier, and highlighted demand-side pressures.