Fuel inflation accelerates RBI action seen

Food prices moderated slightly while fuel price inflation accelerated in late February adding pressure on the Reserve Bank of India (RBI) to raise rates at its April policy review.

India's wholesale price inflation (WPI) is already at 8.56 per cent in January, just above the Reserve Bank of India's (RBI) end-March projection of 8.5 per cent.The food price index rose 17.81 per cent in the 12 months to Feb. 27, marginally lower than an annual rise of 17.87 per cent in the previous week.The recent government decision to raise fuel prices has also stoked inflation. The fuel price index rose 11.38 per cent in the 12 months to Feb. 27, shooting up from an annual rise of 9.59 per cent in the previous week.Market expectations of a rate hike remain unchanged as traders expect the RBI's next move will be to raise its benchmark lending and borrowing rates by at least 25 bps each to 5.00 per cent and 3.50 per cent respectively.The benchmark 10-year year bond is hovering just below the 8-per cent mark mirroring expectations of a rate hike in the near term.This despite talk that the federal government will borrow much of its estimated record borrowing of about $100 billion for the 2010/11 financial year, that begins on April 1, in the first half of the fiscal year.The January industrial output data due on Friday, expected to be a robust 16.65 per cent according to a Reuters poll, will also bolster the case for a rate hike in April.Indian policymakers including the deputy chairman of the planning commission have said earlier this week that food prices will moderate over the next few months.Food prices have moderated only marginally this week, but with fuel prices on the rise, these are now spilling over to the broader economy.This is reflected in the fact that manufacturing price inflation picked up to 6.55 per cent in January from 5 per cent in December.Food prices are making the ruling coalition vulnerable to political attacks.The strength of the coalition has been severely tested on a controversial bill in parliament that seeks to reserve one-third of the total number of seats for women in the house of elected representatives, called the Lok Sabha.