Inflation above 10%; sparks fears of rate hike

The annual rate of inflation, based on monthly WPI, stood at 10.16% for the month of May 2010 as compared to 9.59% for the previous month and 1.38% during the corresponding month of the previous year. Build up inflation in the financial year so far was 1.85% compared to a build up of 2.67% in the corresponding period of the previous year. The official Wholesale Price Index for 'All Commodities' for May 2010 rose by 1.7% to 258.1 from 253.7 for the previous month. The provisional number for March was scaled up to a 17-month high of 11.04% from 9.9%.



The Reserve Bank of India (RBI) will take appropriate action as and when needed to rein in spiraling inflation, Finance Minister Pranab Mukherjee said. Separately, RBI Deputy Governor K.C. Chakrabarty said that the central banker could hike policy rates before its scheduled July quarterly review. The 10-year benchmark bond yields climbed following the hawkish comments by Chakrabarty and by C. Rangarajan, the chairman of the Prime Minister Economic Advisory Panel.

Contrasting with their views, chief economic adviser to the finance ministry Kaushik Basu said that inflation will moderate after the Government decides to de-control fuel prices. The Government is considering allowing public sector oil marketing companies (OMCs) to fix market-determined rates for their petroleum products, but last week it deferred a decision on the matter amid stiff political opposition. Currently, they sell fuel at subsidized rates and get compensated by upstream oil companies and bonds.

RBI governor Duvvuri Subbarao said that the central bank will exit from its loose policy at a calibrated pace. "Yes, that remains our stance that we must do a calibrated exit from the expansionary stance that had been taken during the crisis," Subbarao told reporters in Hyderabad. Subbarao acknowledged that supply-side inflation was spreading and demand-side pressures were building up. He said the RBI is watching growth, inflation as well as the situation in Europe and the domestic liquidity situation.

"The effective rate has moved up from the reverse repo rate which is at 3.75% to the repo rate which is at 5.25%. So there has been some automatic tightening which has taken place," Subbarao said. He said that the RBI would revisit its end-March 2011 forecast of 5.5% in its 27 July review after the March wholesale inflation rate was revised up to 11.04%, well above its estimate.