New Delhi: Inflation is likely to remain elevated for some more time and “pose a challenge on the policy front” largely due to rising commodity prices and the impact of higher fuel prices on the broader economy.
According to global research firm Macquarie, Inflation has surprised negatively for the past few months and continues to pose a challenge on the policy front and may rise further if government decides to go for diesel price deregulation.
“We believe rising commodity prices threaten to keep inflation high for a prolonged period by feeding into a wider range of goods and services. This may become accentuated later in the year if the government decides to deregulate diesel prices,” Macquarie said.
Last month, state-owned oil companies had hiked petrol prices by Rs5 per litre in view of spiralling prices in the international market. However, the government is yet to take a view on diesel prices.
A decision on raising diesel price is likely to be taken by the Empowered Group of Minister (EGoM) headed by finance minister Pranab Mukherjee in the second week of June.
Inflation stood at 8.66% in April much higher than the Reserve Bank’s comfort level of 5-6%.
The Macquarie report further noted that there is a possibility of inflation touching double digits and leading to further aggressive rate hikes.
Last month, RBI hiked key policy rates by 50 basis points to tame inflation. Another 50 basis points hike over the next couple of quarters is likely, says Macquarie as RBI “focuses on sacrificing short term growth for longer term health”.
RBI has already hiked its key policy rates nine times since March 2010 to suck out excess liquidity from the system and tame demand.
Moreover, Inflation, which had so far been largely limited to primary articles is now beginning to look more broad based.
According to the report, primary goods inflation is feeding into prices of manufactured goods as well.
Core inflation, which had remained sticky at the 7% level, has now increased to around 8% over the past two months.
“We believe this trend will continue to be the important factor going forward since inflation, which had been largely limited to primary articles, is now beginning to look more broad-based,” Macquarie added.