The timing of the latest annual inflation number — at 9.78 per cent for August and the highest in 11 months — couldn't have been worse. It comes just two days after industrial growth data, showing a mere 3.3 per cent year-on-year increase in July — the lowest in 21 months. Reconciling these two apparently contradictory trends, and deciding which is to be given more weightage, is not going to be an easy task for the Reserve Bank of India (RBI) in its Friday monetary policy review. On the face of it, inflation presents the more immediate challenge. The wholesale price index (WPI)-based inflation rate has been hovering above nine per cent since last December and this persistence provides justification for continued monetary tightening by the central bank. That case is also strengthened by the rupee weakening against the dollar by about 3.8 per cent in the current month alone, which, by making imports costlier, could further stoke inflation. Throw in the fact that the industrial growth figures themselves have been swinging wildly with a slump (3.3 per cent) in the latest month being preceded by an impressive 8.8 per cent in June, and there is hardly any proof of serious slowdown setting in. It could be argued, therefore, that the RBI may go ahead with one more 0.25 percentage point hike in its repo rate, to add to the cumulative 3.25 since mid-March 2010.

But, then, the latest inflation numbers themselves need a closer look. Inflation in August over the immediate previous month (7.01 per cent, annualised) is lower than the annual inflation of 9.78 per cent when measured over August 2010. For manufactured products alone, the record is even better. What this suggests is that there is some sort of moderation of the price increases which could get reinforced in the months ahead as the ‘base effect' of last year's high WPI kicks in. Also, the inflation has been more pronounced in primary articles (12.58 per cent) and the fuel group (12.84 per cent), which are largely agri-related or whose prices are administered by the Government. It is doubtful how much repo rate increases can help check the prices of onions (up 45.29 per cent over last year) or oilseeds (16.33 per cent), where inflation has more to do with supply not responding adequately to consumption that is growing more with rising incomes.

Given all this, there is a strong case for the RBI to refrain from raising rates now and allow the transmission mechanism of past hikes to work through the system. Simultaneously, it must closely track both domestic as well as global developments, especially in the light of a worsening European sovereign debt crisis. If conventional monetary tools have not really helped tame inflation, they shouldn't risk choking growth either.

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