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Inflation in double digits, rate hike looks imminent

Driven by spiralling prices of essential items, inflation surged into double digits at 10.16 per cent in May, the highest in the last 19 months, adding to the woes of the common man.

Soaring inflation, according to analysts, may prompt the Reserve Bank to tighten liquidity at its quarterly monetary policy review scheduled next month.

The essential items which have become expensive, directly hitting the pocket of the common man, include pulses, vegetables and sugar. Furthermore, the prices of metal, textiles and plywood prices have also gone up, as inflation has spread to non-food items.

The data further revealed that the final inflation figure during March was 11.04 per cent, up from the provisional figure of 9.90 per cent. The data for May, too, will be revised later.

As per the provisional data, the previous high of 10.72 per cent was witnessed in the last week of October, 2008.

"It (high inflation) is always a matter of concern. Something more needs to be done by RBI. RBI is already doing it... (We are) in touch with the RBI," Finance Secretary Ashok Chawla told reporters in New Delhi.

Inflation, which remained confined to food items for some time, is now spreading to manufactured items. Food inflation remained at the enhanced level of 16.49 per cent despite moderation from 16.87 per cent in the previous month.

"The picture is clear that inflationary pressures are now stronger. March figures are revised upwards. Manufacturing sector inflation is up and is not confined to food. So, some action would be called for by the RBI in terms of policy tightening... some action on the demand side," Prime Minister's Economic Advisory Council Chairman C Rangarajan said.

Commenting on the inflation, Planning Commission Deputy Chairman Montek Singh Ahluwalia said, "There is no doubt that in the first few months there has been rise in inflation. Our assessment is that it going to come down towards the end of the year. I think that remains my view and you will see."

Prime Minister Manmohan Singh had said last month that inflation would moderate to 5-6 per cent by December.

Rising inflation may prompt the Reserve Bank to tighten money supply at its first quarterly review of the monetary policy due on July 27.

"I would think interest rate has been on the low side. Some upward adjustment by the RBI at its July policy review wouldn't be surprising," said former Chief Economic Advisor N Shankar Acharya.

ASSOCHAM Secretary General D S Rawat said, "The government should definitely contain inflation, particularly on the food items, and help the industry to increase its production and expand."

"A lot of officials have been speaking about the possibility of inflation coming down... I will be hard put (to say when will it start declining). A lot will depend on the monsoon," Acharya said.

The spike in prices, according to Jayati Ghosh, a professor at the Centre for Economic Studies and Planning School (Social Sciences), Jawaharlal Nehru University, was inevitable after the government raised petrol prices in March following the Budget.

"It was expected at the time of the petrol price hike. They will try deal with it by raising interest rates, rather than addressing the cost push elements," she added.

According to Yes Bank Chief Economist Shubhada Rao, "Inflation is also spreading to the manufacturing sector... Looking at the figures, one can say that there is chance for RBI to act before the policy. We expect a 25 basis points hike in repo and reverse repo rates."