Price surge in May sets stage for interest rate hike

Our Bureau Updated - June 17, 2011 at 08:44 PM.

Hardening core inflation will have to be addressed: Pranab

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Headline inflation climbed sharply in May, topping market estimates and bolstering expectations of a 25 basis point rate hike later this week.

The annual Wholesale Price Index rose 9.06 per cent during the latest reported month, well above April's provisional estimate of 8.66 per cent. Manufacturing goods were mainly responsible, even as both food items and fuels eased a bit. Analysts pointed to the sharp increase in the manufactured product inflation being indicative of prices spilling over to the core inflation components — the non-food, non-fuel items. In what could add to the worries, the final inflation estimates for March were revised sharply upward to 9.68 per cent from the provisional estimate of 9.04 per cent.

The Finance Minister, Mr Pranab Mukherjee, said the Government would take “appropriate action” to contain prices. “Core inflation continues to harden. This poses some concerns which will have to be addressed,” he said in a statement.

This was seen by economists and traders as a pointer to another 50-75 basis points hike in key rates by the Reserve Bank of India before the central bank pauses its monetary tightening. The bleak outlook on the inflation front follows a dip in GDP growth during the January-March quarter to 7.8 per cent, the lowest in five-quarters. The central bank has raised key policy rates nine times since March 2010 in an effort to tame runaway inflation.

In May, manufactured goods accelerated 7.27 per cent on an annual basis from 6.18 per cent in April, with items such as edible oils, sugar and cotton textiles largely causing the flare-up. Fuel inflation continued in the double-digit, despite easing to 12.32 per cent in May from the 13.32 per cent rise in April. Food inflation in May slowed to 8.37 per cent from 8.71 per cent in the previous month, with pulses, vegetables and cereals contributing to the downward trend, even though fruits edged up sharply.

The spike in the May inflation estimates, analysts say, cements the case for at least a 25 basis point rate hike at the RBI's midterm monetary policy review on Thursday. That the markets have pretty much factored in this hike was evident from the benchmark indices closing higher on Tuesday, despite the inflation estimate for May topping expectations. Bond yields and the rupee also gained.

The Chairman of the Prime Ministerial Economic Advisory Council, Dr C. Rangarajan, said: “I think in a sense the inflation numbers are upsetting. One had expected the inflation rate to come down; on the other hand it has risen… We need to use both monetary and fiscal policy to contain inflation.”

>anil@thehindu.co.in

Published on June 14, 2011 17:05