Inflation backs off 3-yr peak, risks remain

Indian inflation backed off three-year peaks in early April, but many analysts expect it to hold at elevated levels in coming weeks, prompting the central bank to tighten cash conditions.
The wholesale price index rose 7.14 percent in the 12 months to April 5, slightly less than expected and falling from the previous week's rate of 7.41 percent, which was the highest since November 2004.
"The lower-than-expected inflation reading is good news," said Sonal Varma, an economist at Lehman Brothers in Mumbai.
"However, we expect inflation to remain above 7 percent in the coming weeks as risks remain skewed firmly to the upside," Varma said.
"With fiscal and trade measures already in place to tackle inflation, we expect the central bank to keep repo and reverse repo rates unchanged in the April policy because of slowing growth," she said.
"But measures to tighten liquidity cannot be ruled out."
The central bank's next scheduled policy review is on April 29.
Thursday's data showed prices of food articles and metals rising most strongly.
Wholesale inflation has shot up since late last year, more than doubling since November as India, like other countries, felt the impact of soaring oil and food prices.
Policy-makers with state and general elections due this year and next have responded with a flurry of duty cuts and export bans to try to ease price pressures.
Expectations the central bank might also take imminent action helped push the yield on 10-year government bonds to a nine-month high of 8.12 percent on Thursday.
Federal and state bond supplies due next week also contributed the rise in yields, which dipped back to 8.10 percent by 0950 GMT.
The stock market was up 1.5 percent, bolstered mainly by gains in overseas markets.

CENTRAL BANK
The repo rate, through which the central bank lends cash to banks, has remained unchanged for the past year at 7.75 percent.
The cash reserve ratio, which is the proportion of cash that banks have to keep with the central bank, was last raised in November to 7.50 percent.
Reserve Bank of India Governor Yaga Venugopal Reddy said this week that inflation was at unacceptable levels and that inflation pressures were rising faster than anticipated, in part due to sharply higher world food prices.
Inflation struck its three-year high of 7.41 percent at the end of the 2007/08 fiscal year, well above the central bank's comfort zone.
The authority had said it wanted to keep inflation at close to 5 percent by the end of that fiscal year.
Finance Minister Palaniappan Chidambaram said on Wednesday that the government would not hesitate to take tough measures against anyone caught hoarding commodities, and the central bank would take more monetary steps soon to tame inflation.
The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it covers a higher number of products and is published weekly.