Inflation Conundrum: Expect action from Government

WPI Inflation, at 6.68% (for the week ending 15 March 2008), is at a 59-week high – far above the RBI’s comfort zone of sub-5%. Though we have observed a broad-based price increase since January 2008, a sharp rise in prices of ‘manufactured products’ (specifically metals & alloys) in the recent weeks has pushed inflation numbers up. Along with the continued rise in primary inflation caused by rising prices of food products (cereals, oil seeds, fibers); it presents a serious ‘cause of concern’ for regulators. We expect a slew of monetary and fiscal measures, which could impact the expectations of lower interest rates in the economy; as well as fear of govt. enforced price control. These developments will be negative for interest rate sensitives and commodity stocks (e.g. steel).