Inflation breaches 6%; base effect, says FM

New Delhi, Jan 19 | Updated: Jan 20 2007, 07:17am hrs

Sustained rise bound to pinch common man, deposit income
Headline inflation has soared beyond 6% to a two-year high. If the rise continues, it could lighten the wallet of fixed-income groups, including the salaried class, and reduce the real income from interest on banks and post office deposits.

Inflation for the week ended January 6, 2007 rose to 6.12%, compared with 3.86% in the corresponding week last year. The bond markets responded, with the yield on 10-year government paper dropping to 7.79% from 7.83%.

Finance minister P Chidambaram said the spurt in the wholesale price index year-on-year inflation was indeed cause for concern, but added it was largely because of the base effect (the rise looks large when compared with the falling WPI during the same period last year).

C Rangarajan, chairman of the Prime Ministers Economic Advisory Council, attributed the jump in inflation to a combination of supply-side constraints and the base effect. The inflation rate now is over 50 basis points more than the Reserve Bank of Indias upper band target of 5-5.5% for the full year, and a good 200 basis points more than the governments 4% comfort level.

Chidambaram promised all steps to curb the price rise. With the Budget barely 40 days away, several economists feel the finance minister may announce measures like a steeper cut in customs duty, lower fuel prices and tax breaks to assuage the concerns of MPs.

FMS Arsenal

Reduce customs duty in Budget to soften prices
Give tax breaks to appease common man & MPs
Tighten regulations in the commodities market
Lower fuel prices taking
cue from falling crude

For the common man, the bad news comes on the roti-kapada-makan front, with prices of fruits, vegetables, edible oils and cotton textiles having already risen. In a statement, the ministry acknowledged that rising prices of items of daily use such as urad, tea, tomatoes, coconut and arhar were causing concern. The rising inflation may also see the RBI signalling an upward revision in interest rates.

Reading a statement after a CII function, Chidambaram said the ministry was in touch with both the RBI and the agriculture ministry. We will watch the situation carefully and take necessary steps, he said.

Rangarajan told reporters on the sidelines of the conference the RBI had taken necessary steps to cool the economy. He said the futures market for commodities might have to be studied to see if it was causing the rise in prices of commodities.