Inflation climbs to 8.24%, RBI may intervene

Refusing to be tamed, inflation soared to yet another high at 8.24% on Friday for the week ending May 24. Announcing the figures Finance Minister P Chidambaram said, “The food prices under pressure. But the government is confident of overcoming difficulties.

The unrelenting upward trajectory of inflation is expected to worsen in the days to come when the steepest-ever hike in petroleum prices, that were announced earlier this week, starts to take effect.

It was 8.1% for the week ending May 17. Wholesale prices-based inflation stood at 5.15 percent a year ago. The rate of price rise is expected to advance further after two weeks, when the June 5 increase in prices of petrol, diesel and cooking gas would be taken into account.

During the week ending May 24, non-food articles, raw rubber, raw cotton and groundnut seeds became expensive by 1-2 percent.

Finance Minister P Chidambaram admitted that inflation was a problem, but with people`s support price stability could be ensured.

Cereal prices went up by 0.5 percent, while fruit and vegetable prices declined by about one percent.

Despite fiscal measures taken by the government, prices of imported edible oil surged by 6 percent.

The Finance Minister added that authorities may take more steps to control inflation if needed.

The inflation was 7.82 percent for the week ended May 10 as compared to 7.83 percent for the previous week, said the official figures released today. During the corresponding week a year ago, the inflation stood at 5.62 percent.

RBI to chip-in

Earlier on Thursday, RBI Governor Dr YV Reddy had made it clear that the RBI, in an effort to stem inflation, is ready to take recourse to a full range of instruments that will include both conventional and unconventional ones.

Referring to the impact of the fuel price hike on inflation, Dr Reddy said the global hike in oil prices and subsequent increase in Indian domestic prices were more than anticipated by the central bank.

“However, we did factor in the hike in oil prices in our policy. The RBI is also ready to use forex reserves which are meant to meet any shocks, such as the oil shock”, Dr Reddy said.

The current fuel prices can be referred to as an ‘extraordinary situation’, and in this context the RBI will focus on careful management of the liquidity conditions in the country, the Governor said. “It has assumed some urgency now”, he commented.

With regards to GDP growth Dr Reddy said the he anticipates it to be in the range of 8 to 8.5 percent, subject to a ‘normal’ monsoon. He felt that the Centre’s decision to hike domestic fuel prices was very appropriate. The Governor was responding to a range of questions from newspersons.

Analysts sceptical

"It (inflation) could cross 9 per cent in the near term owing to the hike in petrol and diesel prices," HDFC bank chief economist Abheek Barua told a news agency.

ICICI bank CEO and MD K V Kamath said, "A 10 percent sustained rise, if passed through, can add as much as 1.3 percent to inflation."

Inflation was over 9 percent nearly 13 years back in September 1995.

Petroleum Secretary M S Srinivasan said the hike could lead to an about 0.5-0.6 per cent rise in inflation rate.

Petrol and diesel prices, which have gone up by 11 percent and 8.5 percent respectively, will increase the inflation rate by about 0.3 percent, while LPG cylinder would add 0.2-0.3 percent to the rate.

Besides, there would be cascading effect of diesel price rise on commodities in due course of time by way of higher transportation cost, adding to the inflation.

A study by CRISIL said the petroleum price hike would push up inflation by 95 basis points through both direct and indirect impacts.

The hike in prices would be reflected in official inflation data slated to be released on June 20.

Anti-inflationary measures are unlikely to turn India into a slow growing economy, while other Asian nations could face the situation of rising prices and economic stagnation, a latest report says.

"We do not believe that India would be affected significantly in a stagflation scenario and growth would remain strong in relative terms...," global research firm Lehman Brothers said in a recent research report.