Though the price rise is expected to cool by next week as steel and other commodities come off their high levels, RBI is unlikely to ease interest rates during its review of monetary policy on April 29. However, rising prices could impact people paying off monthly loan instalments, as banks will probably raise their payouts.
On the sharp 76-bp rise in the wholesale price index in just one week, the finance minister said the choice was now between a high growth with moderate inflation or vice-versa. The government desires that a balance be struck between inflation and growth. I have so far taken fiscal steps and its now RBIs turn to adopt monetary measures by use of different instruments, he said.
However, the supply side is a crucial issue and to address it, I have allocated Rs 25,000 crore for the Rashtriya Krishi Vikas Yojana and Rs 48,230 crore for the National Food Security Mission, Chidambaram said.
Government data shows the rise in inflation was spurred by higher metal and food prices. Inflation stood at 5.92% in the previous week and 6.56% in the corresponding period of 2007. Inflation had hit a two-year high of 6.69% for the week ended January 27, 2007. Chidambaram said since the price rise was largely due to high prices of commodities, which India imports, inflation was also imported.
The prices of iron ore, lead, zinc, nickel have doubled or tripled between 2004 and 2008. Similarly, prices of rice, wheat, soyabean oil and palm oil have also followed a similar trend. If you are importing some of these goods, you are importing inflation, he said.
The inflation rate has almost doubled since the last week of November. Prices are rising at a time when the $906-billion economy, Asias third-biggest, is expected to grow by less than 8% in the next 12 months, the slowest pace since 2005.
DK Joshi, principal economist at Crisil, said, The high inflation rate is a big surprise. It will mean that RBI will have to continue its stance on interest rates. Even if it decides to increase interest rates, the move will not take immediate effect; it will take about six months to show results.
Saumitra Chaudhuri, member of the Prime Ministers Economic Advisory Council, pointed out, While it was expected that inflation would rise, its rapid rate of growth has been a surprise. Inflation levels will increase further as global food prices increase further in the months to come.
Food items, mainly edible oils, have become more expensive. The index for the fuel, power, light and lubricants group rose by 1%, while that for manufactured products rose by only 0.9%.