WPI inflation seen at 8 pct by end-March - Nomura

MUMBAI (Reuters) - India’s annual inflation based on wholesale prices could speed to 8 percent by end-March 2010 backed by rising input costs and strengthening economic activity, Nomura said in a recent note.

A man carries a sack of potatoes from a vegetable market in Delhi in this August 14, 2009 file photo. REUTERS/Adnan Abidi/Files

Nomura, whose inflation estimate is higher than the central bank’s projection of around 5 percent by end-March, expects the Reserve Bank of India (RBI) to revise its target in its next policy review on Oct. 27.

“We believe that the economy is in the early stages of an inflation pick-up. With input cost pressures building and domestic demand in recovery mode, output prices should follow suit,” Sonal Varma, economist at Nomura, wrote.

However, inflation so far has been driven by supply factors although core inflation, or inflation outside of food and fuel, appears to have bottomed out, she added.

Nomura revised its average inflation forecast for 2009/10 to 3 percent from 2 percent and for 20010/11 to 6.8 percent from 5.7 percent.

It also revised its consumer price inflation estimate for 2009/10 to 10.8 percent for FY10 and 6.8 percent for FY11.

The poor monsoon drove food prices up an annual 16.3 percent in mid September, pushing the wholesale price index up a higher-than-expected 0.83 percent, data showed on Thursday.

Nomura expects both inflation and growth to prompt the central bank to start withdrawal of its easy monetary stance from the first quarter of 2010 and sees a 125 basis-point hike in the repo and reverse repo rates by the end of 2010.

Rising capital inflows could pressure the central bank to curb inflation without sending a rate hike signal to banks, Nomura said.

Therefore it may choose to withdraw liquidity by reducing its open market purchases of government securities and issue market stabilisation scheme bills.

The central bank may also hike the cash reserve ratio (CRR), the amount of funds banks have to keep on deposit with it, by 125 basis points by end-2010 with a first hike of 25-50 basis points possibly by the end of 2009.

Last week, the central bank governor said it needed to control inflationary expectations and support economic growth, while the finance minister also said that rising inflation was a matter of concern.

Reporting by Neha D’silva; Editing by Ramya Venugopal