Mumbai, July 03: Inflationary pressures bottomed out in February, but have been picking up since then on a sequential basis, a HDFC Bank report said here on Friday.
Though inflation is currently in negative territory, "firm food and fuel prices have meant that inflationary pressures are unlikely to abate in a hurry," the report said.
It highlighted the recent hike in key domestic fuel prices as a case in point.
The government has hiked petrol prices by 10 percent and
high-speed diesel by 6.5 percent.
The first round impact of the hike could push up inflation by 0.35-0.40 percent, while the second round impact through higher food prices on account of an increase in transportation costs could be higher, the HDFC report said.
For the time being, however, with wholesale price inflation (WPI) pointing to subdued price pressures, there is a relief of sorts for policy makers looking to keep both fiscal and monetary policy accommodative enough to sustain initial signs of recovery through H2 FY'10, it said.
On inflation in the months ahead, the report said that the recent fuel price hike is unlikely to outweigh the impact of the high base effect on YoY inflation and deflation defined on an annual basis is likely to continue till September 2009.
The HDFC Bank report said that seasonally adjusted sequential inflation (month-on-month inflation) is likely to pick-up much faster than initially anticipated.
"This may reduce the value of the sharpest deflation
point between July-August 2009 by as much as 0.30 percent and
mean a faster acceleration in inflation post-September 2009
when the high base effect of last year wears off," it said.
Thus, while some may draw comfort from a relatively
low inflation rate at present, there is little chance of this
comfort extending beyond the next two-three months, the report
said.
There was a likelihood of another round of increase in domestic fuel prices by October 2009, the report warned, on account of the rate at which international fuel prices are gaining ground.
This along with a shrinking output gap and the liquidity overhang created by an accommodative monetary policy through July should see a rapid gain in WPI inflation from -0.7 percent in September to 6.1 per cent in December and 8.5 percent by March, it said.
The Reserve Bank's WPI projection for FY'10 is four percent and hence the report said that the apex bank could start the process of monetary tightening by Q4 FY'10.
"Economic activity is likely to have recuperated to some extent by then and concerns on inflation are likely to take precedence over growth," the report said.
An exit strategy out of the RBI's OMO (open market operations) buy-back operations to accommodate Government paper supply through FY'10 could be put in place as early as October-November 2009, followed by a 0.50-1 percent hike in the cash reserve ratio in January 2010, the report said.
Quantitative policy instruments are likely to be given precedence over hiking signalling rates like the repo and reverse repo rate in the initial phase of monetary tightening since liquidity management is likely to be the first line of defence against rising inflation, the report said.
Bureau Report