Inflation crosses 9 pc, RBI could hike interest rates further

Inflation crosses 9 pc, RBI could hike interest rates further

Even as the increasing prices of essential items pushed up the inflation rate during the reporting month from 8.66 per cent in April, a concerned government said that more steps could be taken in the coming months to tame price rise.

"We would keep a close watch on developments, both domestic as well as international, in the coming months and make appropriate adjustments as we go along," Finance Minister Pranab Mukherjee said after the announcement of the May inflation numbers.

The experts, however, feel that the Reserve Bank, which has raised key policy rates nine times since March 2010, will go in for another round of monetary tightening at its mid-quarterly review slated for Thursday.

The RBI would try to balance the need to tame inflation and promote industrial growth, which has slipped to 6.3 per cent in April from 13.1 per cent a year ago.

"I think the RBI will probably look at the inflation issue more seriously and will take some action... (it) will probably decide to do in the context of the high level of inflation," Prime Minister's Economic Advisory Council Chairman C Rangarajan said.

The inflation numbers for May also capture the increase in petrol prices by over Rs 5 litre last month. Besides other items like cotton textiles in manufactured segments and some food articles like fruits, milk and egg, meat and fish also became expensive in May.

Inflation has been above 8 per cent since January 2010. It has stayed above 9 per cent since December last year and moderated to 8.66 per cent in April this year, before the latest rise.

Mukherjee, however, said the latest numbers are below the 10.48 per cent recorded in May 2010 and said: "... the picture for the latest month is however mixed". While food and primary inflation has declined, "core inflation (that is other than food, fuel and power inflation) continues to harden...this poses some concerns which will have to be addressed", he said.

Meanwhile the inflation for March has been revised upward to 9.68 per cent from the provisional 9.04 per cent.

"While the consistent rate hikes have affected investments and led to fall in growth numbers, inflation still remains RBI's major focus. So we think the central bank will raise rates by 25 basis points on June 16," Deloitte, Haskins & Sells director Anis Chakravarty said.

In May, prices of manufactured products, which have a weight of around 65 per cent in the Wholesale Price Index (WPI) basket, went up by 7.27 per cent year-on-year. Fuel and power segment, with a weight of almost 15 per cent in the basket, stood at 12.32 per cent year-on-year during the period.

However, the rate hike of over Rs 5 a litre in petrol prices by state-owned old marketing companies in mid-May had a visible impact, with prices of the item going up by 27.31 per cent on an annual basis.

Commenting on the latest numbers, Planning Commission Deputy Chairman Montek Singh Ahluwalia said that inflation "is a problem (but) we still remain hopeful... It has gone up, which is not unexpected, because the preliminary indications said it would go up".

FM promises steps to stem prices
Expressing concern over rising inflation which surged past 9 per cent in May, Finance Minister Pranab Mukherjee said government would take appropriate action to contain prices.

“We would keep a close watch on developments, both domestic as well as international, and make appropriate adjustments as we go along”, he said.

Pointing out that inflation for May at 9.06 per cent was lower than 10.48 per cent recorded a year ago, Mukherjee said, “the picture for latest month is however mixed.” While food and primary inflation has declined, “core inflation (that is other than food, fuel and power inflation) continues to harden...this poses some concerns which will have to be addressed”, he said.
 

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