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Inflation back over 6 pc before policy review

Annual inflation rate unexpectedly jumped back above 6 per cent in early April, heightening the risk the central bank will tighten policy at a review next week.

business Updated: Apr 20, 2007 16:01 IST
Unni Krishnan

India's annual inflation rate unexpectedly jumped back above 6 per cent in early April, heightening the risk the central bank will tighten policy at a review next week, but the finance minister said the rise was temporary.

Prices of food and manufactured goods drove the increase, and Finance Minister Palaniappan Chidambaram said the arrival of wheat imports would help moderate inflation.

The wholesale price index rose 6.09 per cent in the 12 months to April 7, data showed on Friday, well above the previous week's annual rise of 5.74 per cent and a forecast of 5.79 per cent in a poll.

"Inflation control remains a very high priority for the government," Chidambaram told reporters, adding he expected data next week to show annual inflation falling back to about 5.7 per cent in mid-April.

The Reserve Bank of India (RBI) reviews policy next Tuesday. It has raised the reserve requirement for banks three times since December and has raised its main lending rate five times since June last year to try to curb credit growth and inflation.

"The bulk of the rise seems to have originated in primary articles, making it challenging for RBI to manage inflation expectations," said A Prasanna, an analyst at ICICI Securities.

"With manufacturing prices also rising steadily, we believe that further monetary tightening is necessary," he said.

Annual inflation hit 6.69 per cent, its highest in more than two years, in late January.

Some economists said despite the spike in early April, an expected moderation in inflation meant the central bank could hold its fire next week.

"If the projection we've made for inflation turns out to be correct, we should be comfortably in the 5 per cent range in a couple of months," said ING Vysya Bank economist Harish Menon.

Finance Minister Palaniappan Chidambaram said last week that measures to curb inflation were always in the offing, and his statement was followed by a cut in import duty on palm oils.

On Thursday, Chidambaram asked state-run banks to moderate credit growth, which is growing about 30 per cent annually.

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