Inflation stays at 6.46% - 3/23/2007

India's annual inflation rate held steady below a two-year high in early March, data showed on Friday, reinforcing the prospect of another increase in interest rates in Asia's fourth-biggest economy.

The wholesale price index rose 6.46 per cent in the 12 months to March 10, matching the previous week's annual increase and slightly lower than forecasts of 6.51 per cent.

Annual inflation hit 6.73 per cent in early February, its highest in more than two years, and analysts said while the inflation rate should ease in coming months, price pressures were still a concern. "Going forward, we expect manufacturing inflation to continue rising at a faster pace than the headline inflation.

Accordingly, we expect the central bank to maintain its tightening bias to contain inflation expectations," said A Prasanna, economist at ICICI Securities. The data did not disturb markets as it was close to expectations. The yield on the 10-year bond edged down to 7.94 from 7.95 per cent, and the partially convertible rupee was unchanged at 43.70.

The Reserve Bank of India (RBI), which next reviews monetary policy on April 24, has stepped up the pace of policy tightening, which began more than two years ago, with an emphasis on draining excess cash from the banking system to stop it fuelling inflation. Finance Minister Palaniappan Chidambaram has repeatedly said the government was confident it could moderate inflation and the aim was to do so without hurting growth.

The economy is expected to grow 9.2 per cent in the year to March 31, its fastest pace in 18 years. The central bank has estimated inflation will be 5.0-5.5 per cent at the end of the fiscal year. "In this scenario of high growth and inflation, there is a possibility of further monetary tightening," said DK Joshi, principal economist at ratings agency CRISIL.

Credit is expanding at annual rates of around 30 per cent and money supply at around 20 per cent. Since mid-December, the central bank has twice raised the reserve requirement for banks and resumed sales of market stabilisation scheme bonds to absorb cash from the banking system. The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it covers more products and is published weekly.