Easy loans may be over as inflation hits 4.78%

Easy loans may be over as inflation hits 4.78%
The Economic Times, December 15, 2009, Page 1

Monetary Tightening Looks Imminent

Our Bureau NEW DELHI

ANNUAL inflation climbed to a 10-month high fuelled by rising commodity prices, pulling shares off their highs on fears of a possible tightening of monetary policy, even as stocks across the globe rallied after Abu Dhabi agreed to fund Dubai to avert a debt crisis.

Inflation, as measured by the Wholesale Price Index (WPI), rose to 4.78% in November from 1.34% in the previous month, government data showed.

The government and policymakers, who have been saying there would be no reversal of easy policies immediately and that stimulus measures will continue, reiterated the stand on Monday.

“It is not as if we are taken by surprise or that there is any cause for any special emergency measure at this stage,” finance secretary Ashok Chawla told the media in New Delhi.

Prices have been rising at a fast clip in the past few months because of easy monetary policies and falling production of agricultural commodities due to a poor monsoon. But the government and the central bank are hesitant to change the policy stance, fearing that a rollback of easy measures could derail the revival of an economy that grew at 7.9% in the second quarter of 2009-10. Sales of automobiles and consumer durables are zooming due to low interest rates.

However, policymakers may not be able to hold on for long to the current policies if inflationary expectations remain at elevated levels, experts say.

India is the only emerging economy where inflationary expectation is high and the central bank will be compelled to tighten the liquidity scenario from January onwards to stay ahead of the curve, said Manoj Vohra of the Economist Intelligence Unit.

“Though the monetary policy tightening will have an impact only with a time lag of six months, it will help in anchoring the expectations,” said Mr Vohra.

The BSE Sensex fell from a high of 17,275, to end 0.1% lower at 17,097.55 after the inflation data were released on Monday. However, stock indices across the globe rose, with the MSCI World Index rising 0.5% in New York in early trading, after Abu Dhabi provided $10 billion to prevent a default by Dubai’s construction company Nakheel.

In the days ahead, inflation may quicken as many service providers hurt by rising commodity prices start passing on and charging their customers more for their services.

“This is a direct impact of the spike in food and commodity prices and the second-round impact of inflation is yet to set in,” said Indranil Pan, chief economist at Kotak Mahindra Bank.

McDonald’s is set to increase prices by 5-10% in the New Year and Yo! China may follow. Domino’s, KFC and Mainland China have already hiked prices. Food price inflation surged to over 19% in the fourth week of November as potato prices doubled, onions became 23% costlier, rice 11.75%, wheat 12.6% and pulses 42%. Fruit prices rose 13% while milk was 11.4% dearer. Taxi and autorickshaw drivers also plan to raise prices.

The WPI-based inflation may touch 8.7% by end of March, said Mr Pan.