India price rises weigh on industry

Indian food price inflation snapped a three-week easing trend in late March and cost pressures dragged down the pace of manufacturing growth, reinforcing expectations for a second interest rate increase in as many months later in April. Government data also showed the fuel price index continued to rise, adding more pressure to headline inflation that is on track to cross into double digits in March, and which could further contribute to an uptick in manufacturing inflation.

The central bank last month warned of inflationary pressures from higher capacity utilisation and rising commodity and energy costs. That assessment was validated on Thursday by the HSBC Markit Purchasing Managers' Index, which fell to 57.8 in March from 58.5 in February as mounting cost pressures took a toll on output expansion.

"The most attention-grabbing aspect of the March PMI release was the surge in input prices to a new series high, suggesting that companies are facing sizable and mounting cost pressures," said Robert Prior-Wandesforde, senior Asian economist at HSBC.

"We believe the central bank has plenty of catching up to do if it is to deal with the rapid escalation of price risks in the economy," he said. The food price index rose an annual 16.35 percent in the 12 months to March 20, above the previous week's reading of 16.22 percent. Fuel inflation rose 12.75 percent in the same period from the previous week's 12.68 percent rise.

High food prices have put on hold government plans to cut its food subsidy bill and trim the fiscal deficit by raising prices of subsidised food grains for welfare schemes, an unpopular step when inflation remains high.

India's four-month spell of wholesale price inflation above the Reserve Bank of India's perceived comfort zone of 5 percent prompted the central bank in March to unexpectedly hike its key lending rates by 25 basis points. Analysts expect another interest rate hike when the bank reviews policy on April 20, with the central bank's focus firmly on anchoring inflationary expectations as stronger signs emerge the economy is on a steady growth path.

A Reuters poll shows analysts expect lending rates to go up by another 100 basis points between now and the end of December. Separately, data showed February exports rose an annual 34.8 percent to $16.09 billion, the fourth straight rise, a further sign of a strengthening economy. Imports rose 66.4 percent to $25.06 billion in the same period. India's economy, the world's second fastest growing economy after China, probably expanded by 7.2 percent in 2009/10, and is set to grow 8.5 percent in the year that began Thursday and 9 percent the following year, according to government forecasts.

Source: http://economictimes.indiatimes.com/news/economy/indicators/India-price-rises-weigh-on-industry-rate-hike-looms/articleshow/5751973.cms