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India's inflation likely to pick up by year end, Morgan Stanley warns

By Religare

The slight moderation in inflation in October is unlikely to persist,with price pressures expected to remain firm over the coming months,US investment banking giant Morgan Stanley said in a report on Sunday.

India's annual inflation is expected to accelerate by the year end andmay reach 8 to 8.2 per cent in December 2012, Morgan Stanley said.

However, inflationary pressures are likely to ease by the fourthquarter of the current fiscal with annual inflation expected to softento 7 to 7.5 per cent by the three months ended March 2013, theinvestment bank said.


Annual inflation in India fell to the lowest level in eight months inOctober 2012 with the benchmark inflation gauge or the wholesale priceindex (WPI) (on a provisional basis) up by 7.45 per cent in October2012 from the same month last year, down from the 7.81 per cent annualrise seen in September 2012.

However, Morgan Stanley warned that the final reading of the WPI inOctober may be near 8 per cent.

The recent hike in diesel prices by the Indian government is likely totake effect over the coming months, a sign that inflation may remainelevated over the near-term, leaving less room for an imminent ratecut by the RBI.

The Indian government raised diesel prices by nearly 14 per cent twomonths back in a bid to lower its subsidy burden and stem itsballooning fiscal deficit.

Inflation has remained above the RBI's target rate of 5 to 5.5 percent for the past 35 months.

"Given the central bank's guidance for monetary policy stance in itslast monetary policy review on October 30, we believe that policyrates will remain on hold until the end of 2012, with easing to startin Q1-2013", Morgan Stanley said.

"We believe that even as inflation starts to ease from Q1-2013, it mayremain above the RBI's comfort zone for longer. Hence, we expectpolicy easing to be limited to about 50 to 75 basis points in 2013,",it added.

Story first published: Monday, November 19, 2012, 11:30 [IST]
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