Declining oil prices will not lower inflation: Report

August 26th, 2008 - 4:40 pm ICT by IANS  

New Delhi, Aug 26 (IANS) The recent decline in global oil prices will not lower India’s rate of inflation, which will remain “stubbornly strong” in the coming days despite monetary tightening by the central bank, said economic analysis provider Moody’s Economy.com Tuesday. “The recent decline in global oil prices will not help cool consumer price inflation in India because energy prices - subsidised by the government - are still well below international market levels,” Sherman Chan, an economist with Moody’s Economy.com said in a report.

“Until next June, energy prices will also remain notably higher on a year-ago basis because of the cut in subsidies two months ago,” she said.

“The rise in global commodity and food prices is still a major driver of inflation in India. The retreat of oil will only help ease the pressure on the government to further raise domestic energy prices.”

The report said wholesale price growth was expected to peak in this quarter, and there was still a “reasonable chance” inflation rate would fall below double digits later this year.

India’s annual rate of inflation accelerated to a 16-year high to 12.6 percent for the week ended Aug 9.

The battle against inflation will likely come at the expense of economic growth, which looks set to decelerate in the second half of 2008 amid cooling domestic demand and persistent external weakness, Chan said.

While the finance minister and the central Reserve Bank of India (RBI) expect GDP growth to be around 8-9 percent, Moody’s Economy.com forecasts it will moderate to 7.6 percent.

“If growth fails to meet the projection of the RBI, policymakers will be less likely to further tighten monetary policy despite high inflation,” Chan said.

“After raising reserve requirements twice and increasing interest rates three times to a multi-year high, the central bank should be now taking a wait-and-see stance, because it takes months for monetary policy changes to affect the economy.”

Regarding the weakness of Indian rupee, which has depreciated about 10 percent against the US dollar in recent months, the economist predicts the Indian currency will hover around 43 per US dollar for the rest of this quarter and recover to around 42.50 later this year.

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