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India's inflation seen contained despite drought

Unni Krishnan in New Delhi

Ample food stocks are seen keeping Indian inflation from spinning out of control, despite the country's worst drought in 15 years, analysts and industry officials said on Friday.

But they cautioned that this could change if the United States carried out its threat to attack Iraq, triggering a spike in oil prices and hurt the economy of India that is heavily dependent on imported crude.

The analysts said while the drought was likely to hit the winter harvest, most of them ruled out a spike in food prices as India was sitting on record foodgrain stocks of nearly 65 million tonnes.

"Food prices are likely to remain stable," said T K Bhaumik, policy adviser with the Confederation of Indian Industry, which represents more than 4,000 companies.

"Due to the drought we will lose 6-8 million tonnes of food grain stock due to a fall in grain output. Anyway, we don't consume from our current production."

The country's year-on-year wholesale price inflation was at a 46-week-high of 3.41 per cent in the week ending August 17, fuelled by rising prices of manufactured goods.

But rural consumers who saw their incomes shrink after poor monsoon rains damaged their crops in large parts of the country will likely put off purchases of manufactured goods, putting a damper on prices.

Analysts said inflation was unlikely to peak beyond four per cent, and that current levels were good news for India's blighted industrial sector, which has been hit by poor demand and excess capacity in the past year to March. But output had recently started to recover.

"Inflation will probably taper off at four per cent. It's another sign that industrial sector is doing well. There is an emergence of pricing power," said P K Basu, Singapore-based regional economist with Credit Suisse First Boston.

A Reuters poll forecast average inflation, measured by the wholesale price index, will be 3.2 per cent in the year to March 2003 and 4.1 per cent in the following year.

The Reserve Bank of India said last week inflation was unlikely to get out of control because ample foreign exchange reserves and foodgrain stocks were likely to keep a lid on prices.

"It is expected that uncertainties in monsoon conditions should not put any undue inflationary pressures on the economy," the Reserve Bank of India said in its annual report.

MANUFACTURED PRODUCTS

Prices of manufactured goods have risen marginally in the past few months, with demand picking up mainly in the core infrastructure sectors. Manufacturing constitutes almost 65 per cent of the wholesale price inflation index, while food makes up between 20 and 23 per cent.

India's industrial output rose 4.0 per cent in the April-June quarter compared with 2.2 per cent in the previous year, bringing some cheer to India's beleaguered manufacturers.

Analysts said the moderate inflation outlook was unlikely to force the RBI to hike interest rates, now at 30-year lows.

Indian bonds yield had previously risen in response to the firmer inflation data on fears that the elbow room for the central bank to cut rates would diminish. But the concerns have ebbed recently.

"I don't expect nominal rates of interest to rise. One, core inflation is low and, secondly, there is significant liquidity in the system," said Shashanka Bhide, economist with the New Delhi-based National Council for Applied Economic Research.

Low inflation in 2001 gave enough room for the central bank to cut rates. The key bank rate was cut by 150 basis points to 6.5 per cent in 2001, bringing down real interest rates on government borrowing.

"The expected modest rise in inflation has already been factored in by the markets," securities firm JP Morgan said in a report dated August 30.

"In addition, comfortable liquidity, positive bond market sentiment and expectations of a modest rupee depreciation are expected to keep the interest rate outlook positive for the remainder of the year."

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