Inflation may peak at 6.5 pc by end 2008: HSBC

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Mumbai, Mar 10: Multinational Bank, HSBC has forecast a peak inflation rate of 6.5 per cent at the end of 2008 and has revised its Wholesale Price Inflation (WPI) forecast at an average of 6.2 per cent for fiscal 2009. The Bank in a review here said, through the inflation leel had not reached a level that was likely to trigger panic within policy circles, the pace of increase must be a concern.

HSBC stated, ''If our new inflation projections are right, while growth continues to soften as we expect, then RBI and government face an even tougher year than we thought previously.'' The Central Bank was likely to react by leaving policy rates unchanged, it said. ''We have removed the two 25bp repo rate cuts we had pencilled in for this year (postponing them until 2009). In any case, the state banks are doing some of the work for the RBI in easing their rates,'' it added.

The government, meanwhile, has shown its hand in the 2008 Budget targeted at the rural poor and would presumably await the verdict of the opinion polls and local elections before deciding when to hold the general election and if further measures are required. ''We suspect they may well be given the prospect of higher WPI (and CPI) inflation rates and the huge political sensitivity to rising prices in India,'' the Bank said in the release.

In November last year, (WPI) was running close to three per cent, well below the RBI's 4-4.5 per cent target and in line with the Central Bank's medium term objective, while the latest data for the week of 23 February showed the headline rate at five per cent - the highest since the beginning of June 2007.

The main risks still relate to the fuel and primary articles (largely food) components, which represent 14 per cent and 22 per cent of the WPI basket respectively. While the inflation rates of both have already moved up (to 5.6 per cent and 6.3 per cent respectively), the strength of international oil and food prices suggest they could reach double digits within the next few months.

The manufacturing component should remain more firmly under control, not least because of the previous strength of the rupee, although this week's hike in steel prices is a useful reminder that there are upside risks here as well. The good news, the Bank said was that the various duty cuts in last week' budget would have a depressing impact, although a fairly small one in the context of the other shocks.


UNI

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