There is a serious inflation problem, which is not going away soon. First, consumer price inflation has consistently been above 7% levels since April 2008 that is we have had two years of above average and extremely high consumer price inflation already. Second, with growth on a stronger footing, companies are getting their pricing power back - price rises in food, commodity and energy have now been making their way into the manufactured product space.

Consumer price inflation for rural areas (CPI-AL) stands at 15.77% in March and for urban industrial workers (CPI-IW) was at 14.86%. Consumer inflation will come off its highs very gradually and will continue to rule in the 8-10% range in the year ahead

Meanwhile inflation in wholesale prices (WPI) is touching 10 percent. It will move down towards 5.5% levels by the third quarter of this year if we go by government announcements, but this will largely be the base effect working, month on month rises will continue through the year.

It is not clear what the government is doing with its large food stocks and why. Perhaps it is asking Ganesha to help out, keeping large food stocks for his minions to feast over. But even prasad is distributed after god has had his fill.

The March HSBC Markit PMI showed input prices had reached their series record high i.e since 2005 and in April, input and output price indices rose higher again. Global prices are creeping upward. Higher crude prices (already touching $86), iron ore, coal, steel (the average global price of steel is up 12% in April month on month), rubber (prices expected to rise 35% in the second half of the year) - all these are going to seep into the domestic markets. Further economic growth is unhindered and is bound to put upward pressure on commodity and asset prices.

It is being argued by some that by increasing interest rates the RBI can delay price increases; but the RBI has decided that the negative impact on government fiscal and investment would outweigh the benefits from reduced inflationary pressures. We therefore expect moderate rises of 25-50 basis points at each review this year.

The ball is therefore back in the government’s court. Therefore it will be unable to increase energy price increases any more, its ability to increase minimum support prices will also be compromised, and it may need to control expenditure growth in its welfare programs.

Meanwhile growth is sustained and there seems to be nothing that can impact it; market intelligence reveals that rural market growth is strong and sustained. Investment in infrastructure, housing and productive capacity is going ahead full steam, and exporters are slowly getting their act together.

Overall therefore, watch out for inflation, and have a great vacation this hot summer.

P.S. Please see the accompanying graphs to this newsletter.