Putting further pressure on the government to cut spending and on central bank to hike the key policy rates, despite of moderating industrial growth, head line inflation figures for the month of June came above 10% making it the fifth straight month of double digit inflation.
While the data released by the commerce ministry on Wednesday showed annual inflation at 10.55%, 25 basis points short of 10.8% projected by a Reuters poll, a sharp upward revision in the provisional inflation figures for April triggered speculations about a similar upward revision in the June figures also. On Wednesday the government raised annual reading for April to 11.23%, highest in more than 2 years, from an earlier estimate of 9.59%.
?I do feel that annual rate of inflation will moderate by the end of kharif season and will be as low as 5-6% by the end of the year? finance minister Pranab Mukherjee told media in Delhi after the inflation figures were released.
Continued up-trend in non-food manufactured products from 0.8% in December to 7.3% in June was a major driver behind the inflationary tendencies. Last time non-food manufactured production crossed 8% in mid-2008 and at that time interest rates were 350 basis points higher as compared to the current levels, economists pointed out. The hike in fuel prices in June is expected to push up the headline inflation figures by another one percentage point in July.
With three hikes of 25 bps each in the key policy rates, RBI has been the most aggressive tightener of monetary policy among the G-20 nations after Australia since mid-March. RBI will be reviewing the key policy rates in the quarterly monetary policy on July 27.?Inflationary pressures does not pose a threat to the growth as of now. Fiscal and monetary measures are underway to contain it,? Plan panel member Saumitra Chaudhuri told FE.
Economists are expecting RBI to hike the key policy rates by another 50 bps during the rest of the fiscal. ?Given the growth and inflation outlook the risk to rates is on the upside and would depend on outcome of monsoons, global developments and further rise in non-food manufactured product inflation from 7.3% levels currently,? said Rohini Malkani and Anukshah Shah of Citi in a research note on Wednesday. Any increase in the government spending may offset the attempts by RBI to anchor inflationary expectations.
Moody?s had highlighted the need for a cut in the government spending last week as the monetary tightening can do little to bring down inflation in the short term. The research firm had added that fiscal austerity will ease pace of rise in prices and boost long term prospects of the economy.
Industry associations cautioned the fiscal and policy makers about taking aggressive contractionary measures to target inflation as that might derail the growth momentum.? An anti-inflationary monetary package which does not take into consideration issues of commodity price rise, potential fuel price rise, and the signs of slowing down of consumer goods sector will impact the growth momentum. In this light, further interest rate hike at this juncture is prone with risks,?
said Amit Mitra, secretary general at Ficci.