WPI-based inflation remained stubborn at 6.9% for the third consecutive month, in March 2012 mainly as food inflation surged towards a double-digit mark. Although core inflation indicates easing of domestic demand pressures, higher food inflation threatens to fuel a wage-price spiral leading to persistence in high inflation.

CRISIL Research believes that it is still premature for the Reserve Bank of India (RBI) to start reducing policy rates. First, upward risks to headline inflation remain significant.  Both, food and fuel inflation are expected to remain high during 2012-13. A weak rupee and pass-through of indirect taxes into prices could also add to inflationary pressure. Second, any pick-up in investment growth is more reliant on easing of policy-related bottlenecks than on reduction in interest rates.

A jump in primary food inflation to 9.9 per cent, despite the decline in manufacturing and fuel inflation during March kept WPI inflation high. Primary food inflation rose due a sharp rise in fruits and vegetable prices.

Manufacturing inflation declined to 4.9 per cent in March from 5.7 per cent a month earlier reflecting slowing domestic demand. Non-food manufacturing inflation, the existing measure of core inflation also dropped sharply to 4.7 per cent in
March from 5.8 per cent in February.

CRISIL Core Inflation Indicator (CCII) continued to show sharp moderation in domestic demand pressures. It declined to 4.3 per cent in March, from 5.2 per cent in the previous month. Despite declining core inflation, the pressure on headline inflation remains firm due to upside risks to food and fuel inflation.