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The sharp spike in headline inflation rate to 6.12% has spooked the party that should accompany a heady growth rate of 9% the domestic economy is expected to log in 2006-07. The sharp rise in the prices mean the government and the RBI would have to keep a hawkish eye on any sector that shows a large surge in credit - even as it fuels the growth rate of the GDP.
The good news for the consumers could be another cut in duties on petrol and diesel. But as deputy governor of RBI, Rakesh Mohan said on Wednesday, the cut would only “mask the underlying pressures on core inflation”.
The disaggregated numbers show why inflation is furrowing brows in the government. Manufacturing inflation for example has risen to 5.91% from 5.04% while primary commodity inflation has increased to a new high of 9.28%. “Even if continuing low crude prices leads to another round of cuts in fuel prices in the next few weeks, it is unlikely to have a significant effect on lowering the inflation rate, since petrol, diesel, LPG and kerosene account for only 5.4% of the WPI. In the meantime, we live with a WPI inflation forecast which will hover around 6% for the next few weeks,” a bank analysis on the inflation trend says.
In the run up to Budget 2007, inflation has become such a dominant theme, that the finance ministry and RBI would be particularly keen to ensure that no proposals spike up further inflation fears.
The RBI has already done its bit on Wednesday and so all eyes would be on the finance ministry on what steps it pursues. In the first round the ministry has already slashed the import duties on large swathes of the manufacturing sector. It has also banned futures trading on thinly traded commodities like urad and tur.
For instance, the latest RBI data released with its third quarter review of the monetary policy shows that bank credit for housing sector has risen by 32 % till the end of October 2006, year on year. That for credit cards by 51%, whereas for infra it has risen by much less at 23%.
Mirroring the worry, RBI governor YV Reddy said on Wedenesday, inflation targeting would dominate the bank's management of monetary policies. This would mean that there should not be too much liquidity in the economy (more money supply chases up the price of goods). The RBI has accordingly decided to raise repo rates ( the rate at which banks borrow funds from the RBI), thereby making the cost of funds dearer for them. |
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