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Inflation Already Seen At 9% Despite...

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But since price pressures are largely beyond its control, the RBI will maintain a measured response to fight inflation by managing cash levels in the banking system rather than raising interest rates, which could impact growth, economists said.

A potential rise in pump prices to offset pressure on government subsidies, plus tax cuts and higher Central government salaries that could fuel demand, are expected to keep pressure on inflation in coming months.

If recent and persistent upward data revisions are anything to go by, Friday's data showing inflation hit 8.1 percent in the year to May 17 will not be the peak.

"We may see 9-9.2 percent peak in the near term after the revision to the provisional data," said Sujan Hajra, chief economist at brokers Anand Rathi Securities.

The latest figure for the wholesale price index, the most closely watched inflation measure in India, marked its highest level in more than 3 ½ years and was well above the central bank's target of 5.5 percent for the end of 2008/2009 next March.

But a rate of 9 percent would be the highest inflation since 1995.

The big revisions in the data are due to a time lag in updating domestic prices of international commodities such as iron, steel, edible oils and petroleum prices.

Price Controls

With the central bank's options limited, the government is trying to keep domestic supplies up and external price pressures down by banning some exports and lowering some import duties.

Policy makers, nervous that consumers will exacerbate price pressures by paying up in anticipation of future increases, repeatedly reassure the public that inflation will fall soon.

"Inflation expectations are becoming more entrenched and that is why they are resorting to price controls which is not good," said Shubhankar Das, an analyst at Lehman Brothers in Tokyo.

He was referring to concern than price controls that keep items cheap can stoke demand.

Hajra and other economists see inflation easing towards 6 percent in the second half of the fiscal year after September.

Economists say government price controls and additional subsidies will stoke demand when fiscal policy has already been loosened for state and national polls over the next 12 months.

The government has cut tax this year and may hand out generous federal salary raises. It has also offered $17 billion in loan waivers to small farmers.

"The fiscal policy has not delivered at the central level and the fiscal and the monetary policy are working at loggerheads," ICICI's Prasanna said.

(Reuters)


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