The Hindu Business Line : Inflation spurts to 10-month high on rising food costs

New Delhi, March 20 After a lower growth in industrial production and below expectation performance of the infrastructure sectors, inflation data released on Thursday show that it had surged to a 10-month high to come within touching distance of the 6 per cent mark, effectively dousing expectations of an interest rate cut by the Reserve Bank of India.

The spiralling inflation rate trend, which was up nearly a full percentage point at 5.92 per cent during the latest reported week ended March 8, has given rise to speculation of a possible interest rate hike in the near future, despite signs of a slowdown in the economy.

The WPI-based inflation increased sharply on account of an across-the-board spurt in prices, with cereals (6.28 per cent), milk (9.71 per cent), vegetables (9.79 per cent), dairy products (9.31 per cent), cement (5.13 per cent), iron and steel (20.87 per cent) and edible oils (17.52 per cent) showing a big spurt in year-on-year price levels.

Inflation has been rising for the last nine weeks and the current inflation level is the highest witnessed since May 5, 2007.

With inflation on the rise since December, the Prime Minister’s Economic Advisory Council Chairman, Dr C. Rangarajan, said on Wednesday that price pressures did not favour an early cut in interest rates.

Responding to the latest WPI data, Dr Rajiv Kumar, Director and Chief Executive, ICRIER, said: “The real issue is what is pushing inflation. If commodities and food prices are the reason behind inflation, then nothing in interest rate will be of help. The Government should take action on the supply side. Interest rate hike will not be a good policy option.”

Mr D.K. Joshi, Principal Economist, Crisil, said: “I expect the RBI to maintain existing tight monetary policy stance. I expect the Finance and Commerce Ministries to step in with indirect tax measures like duty cuts to give push on the supply side. The cause of inflation is more on the supply side.”

Economists also point out that according to RBI data, money supply, which was growing around 22.2 per cent annually, is actually slowing down somewhat this year, with the growth pegged at 21.2 per cent.

Since the output has also declined marginally, with GDP growth slowing, money supply growth seems to be in line with the norms of last year.

In other words, there is no basis for any fear that money supply is growing at a faster rate in comparison to output. Hence, inflation is not essentially a liquidity driven phenomenon, they point out.

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