Inflation has hit a 3-year high and stands at 7% versus 6.68% for the week ended March 22 . The market had estimated it at 6.52%.  

 

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The vegetable prices are up 4.9% for the week-ended March 22, while the primary articles WPI (Wholesale Price Index) is 1.8% for the same week end. The minerals WPI is up 38.2%, while the metallic minerals WPI is up 42.8% for the week-ended March 22.

 

The figures have come as surprise as most experts were looking at 6.25-6.75%. Most analysts had predicted that the headline inflation numbers could come off by almost 25 bps on account of a high base effect.

 

 "It looks like there has been some updation of the past prices and that is why we are seeing this kind of jump in the price index." says A Prasanna of ICICI Securities. However Indranil Pan, Chief Economist at Kotak Mahindra Bank feels that due to the non-transparent way in which the re-pricing and the sort of lag effect which is seen in certain items that have been incorporated into the inflation numbers, the broad range comes to 6.50-6.95%"
 
The markets have taken a knock back approach after inflation numbers announcement with capital goods, technology, auto, banking, power and telecom stocks taking a beating."I think the stock market has already been impacted and has come down to about 30%. I think it is not just the inflation and slower growth in India that is worrying but also the problems in the US. So my sense is that the market is going to continue to be volatile and I would say that one should not rule out the market going down a little bit more." feels Vivek Kudva, President-India of Franklin Templeton Investments.

On the monetary policy front, there is a high probability of some or moderate amount of monetary policy riding in the April policy as most experts see no respite for inflation for next 3 months.

"I wouldn’t be surprised if we see a CRR hike today itself." says Prasanna. "But the flows have to support the action by RBI and with uncertainty in equity markets right now, the flows are not as strong and that is probably why RBI may not  immediately go for that kind of an action. Probably once the capital flows pick up, maybe that will be a more sustainable kind of strategy. So immediately for signaling effect, some kind of monetary action is needed." he adds.

Bankers feel that RBI action should work in terms of easing supply constrains and pull down inflation by 50-60 bps.

I think the RBI is in a tough position at the end of the day as the monetary policy has been tight now for quite some time. They had tightened very aggressively last year due to slowing growth rate. In fact I had expected that this year at some point, they will begin to cut interest rates but now that this inflation problem has returned, clearly the Central Bank is not in a position to cut rates in the immediate future." feels Sanjeev Sanyal, Regional Head of Deutsche Bank.

Deepak Parekh, HDFC said, “When there is higher inflation, you have to moderate the growth rate, you cannot have high growth rates and high inflation, and you have to contain the inflation. You have heard the finance Minster say that inflation control and containing inflation is much more important than growth.”