Inflation at 0.48%, may go negative

Inflation at 0.48%, may go negative
The Financial Express, June 5, 2009, Page 2

fe Bureau, New Delhi

The rate of inflation has come down to 0.48% for the week ended May 23 from 8.9% in the corresponding week a year ago. This was the twelfth week in a row when inflation remained below 1%, making room for the government and Reserve Bank of India (RBI) to focus more on growth and cut interest rates. Inflation was 0.61% in the previous week.

The data released by the government on Thursday showed that inflation rose mainly because the prices of primary food articles increased, and analysts said that this segment needs special attention. However, they expected inflation to turn negative in the next few weeks.

“By the middle of June, we should see negative inflation and that should continue until October. Inflation rate is low enough for the RBI to comfortably cut rates,” HDFC Bank chief economist Abheek Barua said. RBI has the tolerance level of 4-5% for inflation during 2009-10.

In the second half of the current financial year, inflationary pressures would once against build up with a projected increase in prices of crude oil and other commodities in the global market, analysts said.

“Going ahead, inflationary risks would grow as global fuel prices have started rising and firmer economic recovery in the second half would also put upward pressure on domestic prices,” Bank of Baroda chief economist Rupa Rege Nitsure said. Price of crude oil came down from $147 a barrel in the middle of last fiscal to around $40 later in the year. Once again, it is looking up and has reached $64 a barrel.

In 2008-09, the government widened fiscal deficit to 6% of gross domestic product through three stimulus packages, containing a slew of fiscal measures, to boost the falling demand, while RBI reduced key rates a number of times to ease interest rates.

At the time of announcing the annual monetary policy in late April, RBI cut repo and reverse repo rates by 25 basis points to 4.75% and 3.25%, respectively, and banks followed the cues. Finance minister Pranab Mukherjee will meet chairmen and managing directors of public sector banks on June 10 and is likely to stress on further reduction in prime lending rates.

“Going forward with the fiscal stimulus package coming to full effect, we expect the aggregate demand in the economy to surge significantly. This will be reflected in rising prices of capital as well as consumer goods. However, a high base will counteract the upward pressure in inflation rate,” CARE Ratings chief economist Soumendra K Dash said.