Even as headline inflation eased just a tad to 6.89 per cent in March from 6.95 per cent in February, food inflation continued to rule stubbornly at higher levels owing to a spike in the prices of food articles such as pulses, potato, milk and protein-rich items.

Not surprisingly, Finance Minister Pranab Mukherjee described the inflationary trend in food items as disturbing and stressed that the government would have to address the problem, especially the supply-side bottlenecks, while noting that overall inflation at close to 6.5 per cent for the fiscal year-end would have been a more comfortable situation.

Commenting on the WPI (wholesale price index) data, Mr. Mukherjee said: “... food inflation in March has increased, which is [a] disturbing factor. I do hope in course of time it will moderate … we shall have to be alert on it ... Of course, the supply side constraint substantially affect food inflation. We will be addressing that.”

Positive aspects

However, there are a couple of positive aspects that can be culled out of the March inflation data. One, that overall inflation at 6.89 per cent for March, 2012, is way lower than the 9.68 per cent pegged for the same month a year ago. And two, inflation in the manufactured goods sector at 4.87 per cent during the month signals a declining trend from 5.75 per cent in February and much below the March, 2011, level of 7.45 per cent although this could partly be attributed to as effect of a high base.

Liquidity

Be that as it may, considering that overall remains sticky owing to high food prices which has to be addressed through supply-side measures and the Finance Minister, in his budget speech for 2012-13, has already indicated the dire need of hiking fuel prices during the year for purposes of fiscal consolidation, the Reserve Bank may deem it fit to meet the widespread expectation of a marginal easing in interest rates along with a reduction in the cash reserve ratio (CRR) so as to provide a comfortable liquidity situation.

Holding this view, ICRA economist Aditi Nayar said that despite concerns related to suppressed inflation and elevated global crude oil prices, the RBI is likely to reduce the repo rate and CRR by 25 basis points each in its annual monetary policy review on Tuesday.

Presenting a counter to this is KASSA Group Director Siddharth Shankar, who feels that food inflation is here to stay in the coming months and with the rupee depreciating, non-food articles inflation will continue to see an upward move. “I feel that RBI should not cut the interest rates … The macro economic factors still do not favour a rate cut,” he said.

As per the official data, inflation in food articles, which has a 14.3 per cent share in the WPI basket, rose sharply to 9.94 per cent in March from 6.07 per cent in February, especially owing to vegetable prices shooting up by 30.57 per cent during the month.

While milk prices went up by 15.29 per cent, rice and cereals turned dearer by 4.73 per cent and 4.41 per cent, respectively and potatoes were costlier by 11.60 per cent. Protein-rich items such as eggs, meat and fish were more expensive by 17.71 per cent year-on-year.

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