New Delhi: The rate of inflation accelerated to the fastest pace in more than 13 years, making more difficult the central bank’s job of containing prices amid slowing growth.
Wholesale prices rose 12.01% in the week to 26 July, after gaining 11.98% in the previous week, the commerce ministry said on Thursday. Economists had expected a 12.01% increase.
The fastest price gains since 1995 have prompted the Reserve Bank of India to raise interest rates three times in two months. Governor Y.V. Reddy last week raised RBI’s benchmark rate by a half point to a seven-year high of 9% and increased the reserve requirements for commercial lenders to 9% from 8.75%.
PRICE SPIRAL (Graphic)
Higher borrowing costs are helping to reduce funds in the banking system. Money supply, which mainly comprises currency in circulation, bank deposits and funds invested in other savings plans, grew 20% in the two weeks to 18 July from a year earlier, compared with 20.5% in the previous two weeks. Rising inflation forced RBI last week to raise its year-end inflation target to 7% from 5.5% and to lower its economic growth estimate for the year to March 2009 to 8% from an earlier prediction of 8-8.5%.
Inflation is likely to moderate to “somewhere around 8%” by the end of March, C. Rangarajan, head of Prime Minister Manmohan Singh’s economic advisory council, said on Thursday.
The government may revise Thursday’s estimate in two months. The commerce ministry on Thursday raised its inflation estimate for the week ended 31 May to 9.32% from 8.75%.