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Inflation at 9.44% adds pressure on RBI to hike rate

Inflation at 9.44% adds pressure on RBI to hike rate
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First Published: Thu, Jul 14 2011. 11 18 PM IST
Updated: Thu, Jul 14 2011. 11 18 PM IST
New Delhi: Annual headline inflation accelerated to 9.44% in June, ahead of the Reserve Bank of India’s (RBI) monetary policy review on 26 July, adding pressure on the central bank to continue with increasing interest rates to curb price rise.
Inflation rate measured by the Wholesale Price Index (WPI) stood at 9.06% in May and at 10.55% in June last year.
Finance minister Pranab Mukherjee said in a statement that inflation figures reported for June continues to be a matter of concern. “We are monitoring the price situation closely. The government is working together with RBI to take appropriate steps to reduce inflation to more comfortable level,” he said.
Speaking at a Business Today magazine event on 5 July, Mukherjee had said that inflation in India may not have peaked as the increase in international crude oil prices have not been passed on completely, crude oil prices are unlikely to moderate significantly and administered electricity prices have not gone up even as input prices have increased.
Mukherjee also said the extent to which the increase in input prices translates into output prices will influence the inflation dynamics in the coming days.
The department of industrial policy and promotion, which releases the data, also revised the inflation rate for April to 9.74% from the earlier provisional estimate of 8.66%.
Also See Double-digit Inflation Looms (PDF)
With revisions in the provisional inflation numbers ranging well above a percentage point, analysts say the real inflation rate may already have crossed 10%.
Revisions in the provisional inflation data has been unexpectedly large in recent months. RBI governor D. Subbarao speaking on the occasion of Statistics Day had expressed concerns over such large revisions. “Often times, it is not clear if the revisions are occasioned by one-off factors or systemic factors. Nevertheless, each time we have to make an assessment of the inflation situation, we are left to double guessing how the provisional number might be revised.”
In June, while fuel group inflation gained 12.8% from 12.3% a month ago, core inflation, which represents non-food manufacturing inflation, increased marginally to 7.3% from 7.2% in May.
The June inflation numbers do not fully account for the fuel price hike last month, Citi India economists Rohini Malkani and Anushka Shah said.
The government raised administered fuel prices on 24 June to reduce the difference between international and domestic oil prices. It raised the price of diesel by Rs 3 per litre, kerosene by Rs 2 per litre and cooking gas by Rs 50 per cylinder.
“With diesel, LPG and kerosene accounting for 6.3% of the WPI, the price hike would have nearly 70 basis points direct impact and an additional 40-50 basis points from second-round effects,” they wrote in a note.
One basis point is a hundredth of a percentage point.
Malkani and Shah said headline inflation rate will remain elevated to an average of 9-9.5% because of the upward revision of minimum support prices of crops and continued upward revisions of past data. They expect inflation rate to come down to 8% by March compared with RBI’s estimate of 6%.
With the inflation rate likely to remain at above 9% in the coming months and RBI reiterating inflation is likely to get priority over growth, Malkani and Shah said that the RBI may increase rates by a further 50 basis points taking the benchmark repo rate to 8% by December with a 25 basis point hike in the policy review later this month.
Rajeev Malik, senior economist at CLSA Singapore, said in a note that the latest inflation offers no cheer to the RBI and the central bank will have little choice but to hike the repo rate by 25 basis points at its quarterly review later this month.
asit.m@livemint.com
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First Published: Thu, Jul 14 2011. 11 18 PM IST