No let-up, inflation hits 16-yr high of 12.63%

Written by Economy Bureau | New Delhi, Aug 21 | Updated: Aug 22 2008, 06:01am hrs
Inflation jumped to a 16-year high of 12.63% for the week ended August 9, compared to 12.44% a week ago, as prices of most products rose with fuel and power index increasing the most at 17.99%. Consumers and companies are feeling the pinch not only due to the massive rise in prices, but also because of a tight monetary policy, which has pushed up interest rates steeply.

Analysts say the rising inflation rate has dashed the hopes of any relaxation in the monetary policy. The Reserve Bank of India (RBI) is expected to raise the rates further, despite a slowdown in industrial growth, profitability growth and overall gross domestic product (GDP) growth.

RBI will review its monetary policy two months from now.

What is a greater cause of concern is the expectation that the inflation rate has not peaked yet, with analysts projecting it to hit close to 14% by the year-end. Final inflation figures in October-November 2008 will be around 13.5-14%. RBI is likely to hike CRR by 25 basis points before September 2008 as part of liquidity management. But we are not expecting any further repo rate hike, said Lehman Brothers Economist Sonal Verma. CRR or cash reserve ratio is the proportion of deposits banks need to keep with the RBI. Repo is rate at which RBI lends short term funds to banks

Stock markets, which closed before inflation data was released, moved downwards, reflecting expectations of higher inflation. The benchmark index Sensex fell 2.96% to 14,243.73 points at Thursdays close.

The yield on 10-year bond too hardened to 9.21% on Thursday as against to 9.14% the previous day. Rates in the call money market also rose. Overnight cash rates ended at 9.20/25%, above the Central banks main lending rate of 9.0%, reflecting tight liquidity conditions. Traders were also wary that sales of Rs 10,500 crore of government securities this week would squeeze available cash.

Inflation for week ended June 14 revised up to 11.80% from 11.42%. Annual inflation rate was 4.24% during the corresponding week of the previous year.

During the week under consideration, prices of primary articles rose by 11.83%, while manufactured items turned costlier by 10.91%.

Fuel and power group prices increased the most at 17.99%. Annual inflation of 30 essential commodities continues to be range bound 5.7- 6.7% in 19 weeks of the current fiscal, the finance ministry said in a statement.

Analysts feel prices of primary articles may come down with better rains, but it is the rise in rates of manufactured items that is going to pose a bigger problem as controlling those takes time.

The rise has mainly come from manufacturing and primary articles. But manufacturing could be the main worry as prices take time to come down in this segment. In fuel and power group, the non-controlled prices should have come down with the fall in crude oil prices, but surprisingly prices have remained at the same level, says Saugata Bhattacharya,

VP (business & economic research), Axis Bank Ltd.

The RBI is likely to raise the repo rate again to control prices that would rise as higher pay for government employees is likely to unleash a wage spiral, he says.