Inflation goes past 12%

Inflation crossed 12% for the first time in 13 years at 12.1% for the week ended July 26, on the back of costlier food items.

Increase in the prices of some food articles and manufactured products pushed inflation to a 13-year high of 11.98 per cent for the week ended July 19. The increase prompted economists to predict another 25 basis points increase in the central bank’s short-term lending rates.

The high inflation and the attendant hawkish monetary policy of the central bank, feel economists, are expected to hit the economy’s expansion in the next fiscal. “We expect more upside in inflation before it comes down. We may have to live with double-digit inflation for at least a couple of months. The central bank may raise its short-term lending rate to banks by a quarter of a percent by September-October,” Crisil director & principal economist D K Joshi said.

Last week on Tuesday the RBI raised its key lending rate for the third time in two months, taking it to its highest in seven years to quell price pressures, dampen demand and keep inflation expectations in check. The apex bank hiked the benchmark short-term rate by 50 basis points, about 25 bps more than what the market had expected, and the cash reserve ratio, the amount of funds banks must keep on deposit with it, by 25 basis points to 9 per cent to absorb surplus cash in the banking system.

"Bringing down inflation from the current high levels and stabilising inflation expectations assume the highest priority in the stance of monetary policy,” the RBI said in its quarterly review.

Inflation, which stood at almost 12 per cent in mid-July, has more than doubled since late February. It accelerated into double digits after a sharp increase in government-set retail fuel prices in June, prompting the RBI to resume interest rate increases after a pause of more than a year.

“Such heavy dose of rate hikes has the potential to slow down the economy’s expansion next fiscal to about 7%,” said Joshi.