ECONOMY CURRENT AFFAIR

Headline inflation surges in March; rate hike seen

NEW DELHI (Reuters) - The headline inflation surged to nearly 9 percent in March, far above forecasts, on higher fuel and manufacturing prices, adding pressure on the Reserve Bank of India (RBI) to take bolder action despite raising interest rates eight times since March 2010.

The RBI had widely been expected to raise policy rates by another 25 basis points at its next review on May 3, but analysts said Friday's inflation figure and a steep upward revision of the January reading add to the case for a 50 basis point increase.

"The market was shocked to see this number and it's showing an increase across the board. The chances of a more aggressive policy action have increased," said Manish Wadhawan, director and head of rates at HSBC India.

The wholesale price index, the country's main inflation gauge, rose 8.98 percent from a year earlier, above the median forecast for an 8.36 percent rise in a Reuters' poll and higher than the annual rise of 8.31 percent in February.

The March reading was above the central bank's projection of 8 percent for the final month of the last fiscal year.

"With inflation numbers of this magnitude, especially core inflation, RBI may feel compelled to be a bit more aggressive next time around and move by 50 bps," wrote Credit Suisse economist Devika Mehndiratta.

Still, with economic growth moderating and the central bank's oft-stated preference for a "calibrated" approach to tightening policy, economists and traders still mostly expect another 25 basis point rise at the next review.

The 10-year bond yield rose 8 basis points (bps) on the day to 8.01 percent after the data, while the 1-year swap rate climbed as much as 19 bps to 7.70 percent. The 5-year swap rate moved up 12 bps on the day to 8.21 percent.

The 30-share BSE index extended its fall to 1.5 percent from 1 percent before the data. The partially convertible rupee weakened marginally to 44.53 per dollar from 44.51 just before the figures were released

UPWARD REVISION

In a worrying sign that monthly data may be understating price pressures, January's reading was revised sharply higher to 9.35 percent from 8.23 percent earlier, and traders said the March reading could eventually be adjusted upwards into double-digits.

"It seems that inflation trajectory has changed. The expected decline in inflation is just not happening and looks like we have underestimated the underlying pressure on prices," said Ashutosh Datar, an economist at IIFL in Mumbai.

"More monetary tightening is inevitable after today's data and the case for a 50 basis point hike in May is strengthened," he said.

The food price index rose an annual 9.47 percent in March, compared with a reading of 10.65 percent in the previous month, while the fuel price index rose an annual 12.92 percent from 11.49 percent in February.

Manufacturing inflation quickened to 6.21 percent in March, its highest since April 2010, compared with 4.94 percent recorded in the prior month.

Central banks across Asia are grappling with quickening inflation, even as high oil prices threaten to slow global economic growth.

Singapore tightened monetary policy on Thursday, while South Korea 's central bank revised its 2011 inflation forecast upward on Wednesday, after keeping interest rates steady.

Analysts expect China will again raise reserves requirements for banks and hike interest rates to put a lid on consumer prices after its inflation jumped to a 32-month high.

In India, manufacturing output, which makes up 80 percent of industrial production, grew an annual 3.5 percent during February, compared with 16 percent a year ago.

Several analysts have cut their India growth forecasts for the fiscal year that started this month, citing the risks from inflation, especially as rising global oil and commodity prices begin to hit the manufacturing sector. The economy is esxpected to have grown 8.6 percent in the year that ended in March.

Prime Minister Manmohan Singh's government, which faces potential erosion of support during ongoing state elections this month over various corruption scandals and rising prices, may have to live with high-level of inflation in coming months

9 per cent GDP growth rate in 2011-12 difficult, says Montek

Concerned over high headline inflation, Planning Commission today raised doubts over clocking the targeted 9 per cent economic growth in the current fiscal."We may not hit 9 per cent (economic growth rate in 2011-12). 6 per cent is the rate of inflation which we should be willing to accept this fiscal," Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters here.The government and the Planning Commission had earlier projected a growth rate of 9 per cent during 2011-12, up from 8.6 per cent in the previous fiscal.Referring to rise in headline inflation to 8.98 per cent in March from 8.31 per cent in February, Ahluwalia said, "inflation has been a concern. It has not come under control as much as I had hoped. There is need to use fiscal and monetary policy to get rid of supply constraint wherever they exist."Referring to growth prospects in the current fiscal, he said, it may be difficult to achieve 6 per cent farm sector growth expected to be recorded during 2010-11."There is no chance for agriculture to grow at 6 per cent this fiscal, it may probably grow at 3 per cent", he said.He pointed out, "Even to stay at 8.6 per cent GDP growth this fiscal, industry will have to do much better. Now industry has done about 7.8 per cent in 2009-10 (so far till February end)".According to the latest data, the index of industrial production for April-February last fiscal stood at 7.8 per cent and the factory output dipped to 3.6 per cent in the month of February as compared to 3.9 in January.