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Inflation may have hit plateau: Pranab

business Updated: Oct 24, 2010 17:24 IST

Reuters
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Headline inflation, which was at 8.62 per cent in September, may have reached a plateau, Finance Minister Pranab Mukherjee said.

High food prices, which have helped keep broader inflation well above the central bank's comfort zone of around 5 to 6 per cent, are the result of both supply and demand factors that reflect changing consumption patterns, Mukherjee said.

The Reserve Bank of India, which expects headline WPI inflation to ease to 6 per cent by the end of March, has raised policy rates five times this year to rein in inflation and is widely expected to raise rates by a further 25 basis points on Nov 2.

"The direction of the inflation rate movement is consistent with the Reserve Bank's projection made in the July review, though the magnitude could be slightly different. Inflation rates seem to have reached a plateau," Mukherjee said in a written response to questions from Reuters emailed late on Saturday.

Wholesale price index (WPI) inflation was in double-digits for six months through July.

Mukherjee said food inflation, which has been stubbornly high and came in at more than 15 per cent in early October on an annualised basis, is both a demand and supply issue.

"High food inflation reflects both demand and supply factors. Demand factors ... reflect changing consumption patterns," said Mukherjee, who was in South Korea for the Group of 20 meeting of finance ministers.

Rising incomes fuelled by an economy on track to grow at 8.5 per cent this fiscal year have led Indians to consume more food.

IMF reforms

Mukherjee welcomed a G20 deal on International Monetary Fund reforms that underlines the growing clout of developing economies by giving them a bigger voice.

"Our complaint was that the quota share should reflect ground reality and economic strengths currently. Otherwise it would have eroded the credibility of the institution. That has now been corrected," Mukherjee said.

Finance minister also said further quantitative easing by advanced economies would cause problems, and Indian policymakers will respond depending on the extent of the easing.

Emerging economies including India are seeing an influx of fund flows from the developing world as investors seek higher returns, pushing up asset prices and putting upward pressure on currencies including the rupee.
The US Fed is expected to embark on another round of asset purchases, which would inject more liquidity into markets.
Mukherjee reiterated the central bank's stated position that India will intervene only if capital flows are "lumpy" and "volatile".

Global regulators are still working on a framework for identifying systemically important financial institutions but Mukherjee said Indian banks may be be asked to maintain additional capital and liquidity levels once proposals are finalised at the G20 level.