INFLATION HITS 13-YEAR HIGH

Inflation zoomed to a 13-year high in the first week of June after the Government hiked retail prices of petroleum products to help provide a much-needed succor to the state-run oil marketing companies, who had been reeling under record crude oil prices. Inflation, based on the wholesale price index (WPI), soared to 11.05% for the week ended June 7 from 8.75% in the preceding week. Inflation rate was well above average forecasts that ranged between 9.8-10.8%. The rate is now at the highest since May 6, 1995, when it was 11.11%. The annual inflation rate was 4.28% during the corresponding week of the previous year. Inflation for the week ended April 12 was revised upwards to 7.95% from 7.33%.

The stock market fell sharply, led by banking and real estate stocks, after the announcement of inflation data. The Sensex and the Nifty closed at their lowest levels since August 2007. Bond prices slid, with the yield on the benchmark 10-year Government bond expiring in 2018 rising as high as 8.66%, their highest in nearly seven years. The rupee was more or less stable against the dollar at 42.97 amid market talk that the central bank may have sold dollars to prevent a further decline in the local currency.

The WPI for All Commodities climbed 1.8% to 235.2 points in the week under consideration. The index for Fuel & Power jumped 7.8% to 374.2 while the Primary Articles index was down 0.4% at 242.5. The index for Manufactured Products rose 0.3% to 201.6. Most of the jump in inflation came from the fuel price hike announced on June 4. The price of Light Diesel Oil surged 21%, while that of Liquefied Petroleum Gas (LPG) jumped 20% and Naphtha prices were up by 17%. Furnace Oil prices increased by 15%, Aviation Turbine Fuel (ATF) prices rose 14%. Prices of Petrol and High-speed Diesel went up by 11% and 10%, respectively. Bitumen prices gained 7%.

The index for Basic Metals, Alloys & Metal Products rose by 1.1% to 295.8. Other Iron Steel prices jumped 14%, while that of Basic Pig Iron and Foundry Pig Iron were up 11% each. MS Bars & Rounds (9%), Steel Sheets, Plates & Strips (4%), and Pipes & Tubes (2%) too turned costlier.

According to some economists, the Reserve Bank of India (RBI) is likely to take more measures to contain spiraling inflation. The fresh tightening step could be announced ahead of next month's quarterly review. Last week, the central bank had hiked the repurchase rate (repo rate), at which banks borrow from RBI, by 25 basis points to 8%. It remains to be seen which instrument, the central bank employs this time to check inflation. The RBI might push up the rupee to fight inflation, some economists said.

The Government, which has been facing flak from its Left allies and the opposition, may also chip in with new set of administrative measures, including price controls on certain items and ban on exports of some others. As a first step, it decided to sell edible oils through ration shops from July. More such steps could be in the offing over the next few days. Meanwhile, in a scary prediction, HSBC's chief Indian economist warned that India could remain in double digits for the next nine months and peak at 15% by the end of 2008.