Inflation turns positive after 13 weeks, presents policy dilemma to central bank

The rise in inflation rate has sent jitters to market watchers as they feel that the surging food prices following the worst dry spell in nearly four decades will give the central bank a tough time in formulating monetary policies.

Reserve Bank of India (RBI) Governor D. Subbarao had cut interest rates six times from October 2008 to April 2009 to shield India's $1.2 trillion economy from the worst global recession since the Great Depression. However, in the last monetary policy announcement on July 28, he left the reverse- repurchase rate unchanged at 3.25 percent and kept the repurchase rate at 4.75 percent.

According to the analysts, India's inflation could climb above the comfort zone of policy makers and herald an end to a soft monetary stance. Earlier this month, the central bank had said inflation was becoming a concern sooner than expected, while the finance secretary forecast it to climb to 5-6 percent by end of March.

The rapid rise in the WPI could also pose a policy dilemma for the central bank given the inability of monetary policy to mitigate price pressures caused mainly by shortages in food supplies, they said.

"There are signs that the sharp decline in core inflation has been arrested and prices have started to inch higher," said Nomura economist Sonal Varma, adding that it might put pressure on the RBI to change its easy money policy as higher food prices will result in an increase in manufactured items.

"The momentum in the WPI inflation has been picking up since the last few months. Much of the increase in inflation is clearly indicative of input cost pressures picking up, and with demand set to recover we should see output prices also picking up with a lag. This will clearly mean that the RBI's concern on inflation is likely to continue and the exit from the current loose policy will depend on how soon growth picks up from here," the economist said.