Indian inflation falls from 3-year peaks, risks remain

Indian inflation fell from three-year peaks in early April, but many analysts expect it to hold up above 7 per cent in coming weeks, and persisting pressures could prompt the central bank to tighten cash conditions.

The wholesale price index rose 7.14 per cent in the 12 months to April 5, falling from the previous week's 7.41 per cent. It was just below market estimates of 7.19 per cent.

Inflation posted its biggest annual rise since mid-November 2004 in the last week of the 2007/08 fiscal year to end-March.

Thursday's data showed prices of food articles and metals rising most strongly.

Surging inflation in recent weeks has become a major headache for policymakers with state and general elections due this year and next, and a flurry of duty cuts and export bans has been rolled out to try and ease price pressures.

Analysts saw little in the way of short-term relief.

'The lower-than-expected inflation reading is good news.

However, we expect inflation to remain above 7 per cent in the coming weeks as risks remain skewed firmly to the upside,' said Sonal Varma, an economist at Lehman Brothers in Mumbai.

'With fiscal and trade measures already in place to tackle inflation, we expect the central bank to keep repo and reverse repo rates unchanged in the April policy because of slowing growth,' she said.

'But measures to tighten liquidity cannot be ruled out.' The central bank's next scheduled policy review is on April 29.

The repo rate, through which the central bank lends cash to banks, has remained unchanged for the past year at 7.75 per cent. The cash reserve ratio, which is the proportion of cash that banks have to keep with the central bank, was last raised in November to 7.50 per cent.

Reserve Bank of India Governor Yaga Venugopal Reddy reiterated this week that inflation pressures were rising faster than anticipated in part due to sharply higher world food prices and that the inflation level was unacceptable.

Finance Minister Palaniappan Chidambaram said on Wednesday that the government would not hesitate to take tough measures against anyone caught hoarding commodities, and the central bank would take more monetary steps soon to tame inflation.

The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it covers a higher number of products and is published weekly.