Inflation at 7.57%; likely to go up to 8%: Experts

Inflation for week-ended April is at 7.57% versus 7.33%. It is at a 42-month high. CNBC-TV18 poll estimated 7.27%.

The Wholesale Price Index (WPI) is up on rise in primary articles and manufactured goods.
Gilts have gone up despite rise in inflation as higher headline WPI has been priced in.
Reacting to inflation numbers, Finance Minister P Chidambaram provided hope by saying current inflation is likely to be contained. He said food prices will come down sooner than other prices. As a contingency, 154 lakh tonnes of wheat and 250 lakh tonnes of rice have been acquired.

But economists are not that hopeful. Sucheta Mehta of Standard Chartered Bank believes inflation won't come down below 5% until Q1 of 2009. "The recent number of course is a surprise. But there were some revisions in commodity prices that were waiting in the wings. For example, cement prices and tyre prices et cetera. These might have contributed to higher manufacturing sector inflation. I think in the coming few weeks to months, we could also see inflation hit 8%, stay above 7% for at least 3-6 months before it begins to taper off," she said.
Indranil Pan of Kotak Mahindra Bank agrees. He explains, "It was a low base effect of the last year, which would be driving inflation. Since we have repriced our indices to such a high level, I think 8-8.25% is likely to be seen in the next 3-6 months. I would also agree with Sucheta that given the high base that we are seeing now, inflation is expected to fall very dramatically in about March and April of 2009."

He also said the RBI is not really interested in interest rate hikes at the moment, unless there is some odd surprise out of the global scenario. "They have made their stance quite clear. Overall, the way they want to move forward is to moderate and manage liquidity and manage inflation in that way. Plus they are also looking at the fiscal measures to actually kick-in significantly and therefore provide a cap on inflation."

Growth is decelerating in India, interest rates are high and CRR is an effective tool. Based on these three factors, CRR would be used more often.
Mehta believes if liquidity turns abundant in the coming few weeks, there will be further CRR hikes. The hike would be used both to manage liquidity and keep inflationary expectations under check. She is expecting about 75 bps hike in CRR from here.