The Hindu : Business : Inflation expected to fall by year-end

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Wednesday, Aug 11, 2004

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Inflation expected to fall by year-end

By Our Special Correspondent

NEW DELHI, AUG. 10 . Even as the Government continued to put together an inflation management strategy, some news has come in from analysts that they expect inflation to fall to 5.6 per cent by the year-end owing to a possible softening of fuel inflation. The annual point-to-point inflation touched 7.51 per cent for the week ended July 24, the latest information available on the inflation trend.

Today, the Union Finance Minister, P. Chidambaram, had meetings with the Reserve Bank of India Governor, Y. V. Reddy, and the Deputy Governor, Rakesh Mohan, and later Mr. Mohan had a separate meeting with the Chief Economic Advisor in the Finance Ministry, Ashok Lahiri. Though no formal word came out of the subject of the discussions, sources indicated that inflation management was high on the agenda. On Monday, Mr. Chidambaram had two rounds of discussions with the Prime Minister, Manmohan Singh.

Amidst these hectic meetings, analysts at Merrill Lynch have put out a flash note that they were of the opinion that inflation was likely to fall by 30 per cent from its peak level (of 7.9 per cent) by March 2005 to around 5.6 per cent. Merrill Lynch also expects fuel inflation to almost halve to 5.5 per cent by the year-end against 10 per cent at present. In contrast, primary inflation was likely to be around 8.6 per cent. Average inflation for the full fiscal (2004-05) was likely to be only a notch higher at 6 per cent, Merrill Lynch said.

Analysts have also termed the sharp rise in primary product inflation was surprising and somewhat inexplicable, given the recent contraction in the primary product index over the past four weeks. However, given the low base of the index for primary products, the analysts feel that inflation was likely to remain above 7 per cent throughout August and expect it to peak at 7.9 per cent by the third week of this month.

Merrill Lynch has, however, warned that rising oil prices remain the key risk to their estimates. If oil companies were to raise fuel prices by an additional 3-6 per cent over the next six months, average inflation for the year could rise to 6.2 per cent, though the peak would still be 7.9 per cent in August.

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