Inflation surges to 7-yr high of 8.75%

New Delhi: India’s wholesale price index rose 8.75% in the 12 months to 31 May, above the previous week’s annual rise of 8.24%, government data showed on 13 June. The numbers beat market expectations that expected it to be closer to 8.3%. The rate is now at the highest since 10 February, 2001 when it was 8.77%.

Industry and market experts expect the central bank to take more monetary action for containing inflation and squeezing liquidity from the system. On 11 June, the RBI had increased its short-term lending rates to banks by 25 basis points. “I expect the CRR to be hiked by 25 basis points" said Amitabh Chakraborty, President - Equity Religare Securities. He also expects the recent revision in fuel prices to push up inflation. “Inflation has risen more than expected because of the recent fuel price revisions. They are beginning to reflect on inflation numbers now," says FICCI economist Anjan Roy reiterating Chakraborty’s view point.

Others like Gagan Banga, CEO, Indiabulls Financial Services also expected the inflation rate to go up to near 10% in short term. However, he did not expect the present rate to have much effect on market sentiments. “This increase in inflation rate has already been factored in," he said.

Inflation for the week ended April 5 was revised upwards to 7.71% from 7.14 %. The annual inflation rate was 5.09% during the corresponding week of the previous year. Mainly, costlier food and vegetables accounted for 0.51% increase in inflation from 8.24% in the preceding week. Despite, several government measures to contain cement rates, prices marginally increased.

National Council of Applied Economic Research (NCAER) senior fellow and expert on trade practices, Rajesh Chaddha, felt that the rise was more duw to international than indigenous factors. “Soaring crude and international food prices as well as the increasing price of metals is reposnsible for the present rates," he said.

If the RBI raises interest rates even further, this may have a negative effect on exports. “Raising money for exports in the short term may become even more expensive if the lending rates are hiked further," said Chaddha. He added that over the medium term, interest rate does have an impact on exchange rate as well.

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