Inflation breaks 13-year record to cross 12%-mark

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New Delhi, Aug 7 : Breaching the 12% psychological mark, inflation rose marginally to a fresh 13-year-high of 12.01% for the week ended July 26 from 11.98% in the previous week. The finance ministry said in a statement that the week-on-week price rise has stabilised but many analysts argued that inflation is yet to peak and it could touch close to 14% by the year-end. A further monetary policy tightening is not ruled out, analysts say, although some believe that the Reserve Bank of India has taken pre-emptive steps and therefore, another round of monetary measures may not be called for.

Also, a moderation in industrial output growth and overall gross domestic product (GDP) growth could mean that the policy response remains muted. "After the latest round of rate hikes by the RBI, I don't think it will go in for any further monetary tightening unless there is a dramatic surge in inflation. RBI is not expected to go for any such hike as it will also affect economic growth adversely," says DK Srivastava, director, Madras School of Economics. Inflation stood at 4.7% in the corresponding week last year.

In a bid to tame inflation, RBI last month increased the short-term lending (repo) rate by 50 basis points to 9% and also raised the mandatory deposits (CRR) that banks have to park with it by 25 basis points. However, the exact effect of these measures will be known only after some time as official data is released with a two weeks lag and hike in CRR would come into effect only on August 30.

Lehman Brothers’ economist Sonal Varma said another round of repo rate hike was ruled out, though RBI could raise CRR. “ Inflation is broadly in line with our expectations. The pace of increase remains in the comfort zone. We do not expect any repo rate hikes this year since the RBI has been pre-emptive in hiking rates and given that growth will be much weaker going forward, we continue to expect 25 basis points CRR hike in Q3 2008 to tighten liquidity,” Varma said.

The impact of inflation data on stocks, bonds and currency market could not be gauged as the figures were released after these markets closed in Thursday.

According to the data , prices of most of food articles went up, although some items like fruits showed downward trend, whose prices declined by 0.5%. In its statement, the finance ministry said out of a total 98 primary articles, prices of 18 have declined as compared to the previous week.

Out of 318 manufactured goods, prices of only 15 rose while the remaining were stable, the statement said. Prices of iron and steel remained unchanged but cement prices marginally increased. However, the good news is the crude oil price meltdown, which can bring down prices of industrial fuels to an extent. Among the primary article, prices of raw tobacco increased by 5%, raw cotton by 2%.