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BANGALORE: India's uncomfortably high inflation will subside only gradually in the coming quarters as the economy continues to race ahead, likely prompting the central bank to hike interest rates more aggressively than earlier thought, a Reuters poll showed.
The wholesale price index (WPI), India's main inflation gauge, is expected to rise by an average 8.8 percent for the fiscal year ending March 2011 before easing to 6.4 percent in the following year. This is considerably higher than 8.3 and 5.7 percent forecast in the October survey.
Driven by costlier food items, wholesale price inflation soared to an annual 8.43 percent in December, compared with an expected 8.35 percent and above the previous reading of 7.48 percent.
Many economists now believe the Reserve Bank of India (RBI) will be forced to undertake much swifter policy tightening than was previously foreseen.
"The unexpected rise in December inflation ... turned out to be a game-changer, and is likely (to) push the central bank to front-load another rate hike in January, despite the source of pick-up coming largely from volatile food articles," said Siddhartha Sanyal, chief economist at Barclays Capital in a note.
Price growth would remain above the RBI's comfort levels, according to the latest poll, averaging 7.7 percent in the quarter ending March before easing to 5.5 percent in the second half of 2012 -- a level the central bank had hoped to reach by March this year.
The poll predicts the central bank will increase rates from 6.25 percent now to 7.0 percent by end-September this year, a quarter earlier than was predicted in a Jan 5 survey, before the latest inflation numbers were released.
From there, forecasters expect the RBI to increase rates slowly to 7.50 percent by the end of next year.
The RBI, seen as Asia's most aggressive major central bank after it increased rates six consecutive times last year, is set to raise rates by at least 25 basis points in its Jan 25 policy meeting, with some analysts even predicting a substantial 50 bps hike.
GROWTH SLOWDOWN?
While rampant inflation will be the RBI's primary concern, it will also be mindful of a slowdown in growth -- mainly in industrial output which slumped to an 18-month low of 2.7 percent rise in November from the 11.3 percent increase seen a month earlier. The Indian economy is still set to grow at the same robust pace seen over the last fiscal year, averaging 8.7 percent in the year-ending March 2011, before moderating slightly to 8.5 percent in the following year.
These figures are markedly above October's consensus of 8.4 percent and 8.3 percent, respectively.
The poll sees growth remaining consistently above 8.0 percent year-on-year in every quarter until the end of next year.
"It (the Indian economy) will slow down from the current year," said A. Prasanna, head of research at ICICI Securities Primary Dealership. "It's partly because of agriculture -- this year agriculture is rebounding from a drought, so there is the base effect in play, next year that won't be the case." "On top of that, industrial and services sectors should also slow down because (the) RBI has tightened policy and on the fiscal side also there is likely to be some tightening." Manufacturing and services PMI readings for December, which underlined some slack in the economy, further stressed the uneasy balance between inflation and growth facing the central bank.
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