NEW DELHI, March 19: India’s inflation rate rose for the second straight week to inch above the 5 per cent mark in data released on Friday, prompting the government to say that reining in prices remained a priority. Annual wholesale price inflation, the benchmark for inflation in India, rose 5.30 per cent in the week ended March 5 from the previous week’s 4.95 per cent on higher edible oil, coffee, chemical and metal prices. Inflation had been declining since it hit a 3-1/2-year-high of 8.74 per cent in end-August forcing the government to unveil a series of measures, including cutting petroleum duties, but a recent rise in global oil prices could threaten price stability. Oil prices remained just over $1 below record highs on profit-taking as US light crude slipped 9 cents to $56.31 per barrel after hitting an all-time-high on Thursday. “Although the rate of inflation has remained consistently moderate in the last few year, containment of inflation remains high on the agenda of the government,” Junior Finance Minister S.S. Palanimanickam told lawmakers in parliament. “High inflation puts pressure on interest rates leading to a rise in project costs and investment. It also tends to reduce real interest rates thereby adversly affecting savings rates.”

He said the government was keeping a close watch on inflation and its anti-inflationary policies included strict fiscal and monetary discipline, rationalisation of import duties and prevention of any supply disruptions of essential goods.

The central bank increased the benchmark short-term interest rate by 25 basis points to 4.75 per cent in October, its first increase in more than four years to counter inflation.

The government fears a rise in inflation could put pressure on interest rates, pushing it up from current low levels and slowing the pace of investment.

Finance Minister Palaniappan Chidambaram urged the central bank in a meeting earlier this month to keep interest rates benign in a bid to fasten the pace of economic growth.

The Indian economy is poised to grow nearly 7 per cent this financial year ending March 2005 helped by strong manufacturing and services sector growth but a continued rise in oil prices could upset the smooth sailing in the next year.

India, Asia’s fourth-largest economy, imports 70 per cent of its crude oil requirements and price rises can hurt growth. Analysts said a $5 per barrel rise in oil prices would cost 0.5 percentage points of Indian economic growth.

“With high global oil prices the impact on domestic prices will be strong. The government has not increased retail prices of petroleum products and state-run oil companies are absorbing the shock but for how long?” said D.H. Pai Panandikar, director with private think-tank RPG Foundation.

I expect the impact of crude oil prices to be fairly strong on the inflation rate in the coming weeks.

Indian fuel prices are state-regulated. But if the Congress-led government shies away from price rises due to pressure from its far-left allies, the profits of state-run oil firms will be hit.

The oil firms pay huge annual dividends to the government and help it bridge any revenue shortfall during years of slowdown. —Reuters