Inflation hits 13-month high
Sep 14 2011 , New Delhi
Tags: News
Prices of manufactured products increase due to high cost of raw materials
The rate of inflation shot up to 9.78 per cent in August, the highest in 13 months, with the inflation in manufactured products inching up to 7.79 per cent driven by high costs of industrial inputs.
The inflation figures, coming just a couple of days ahead of the scheduled announcement of the Reserve Bank of India’s money policy on Friday, made a further interest rates hike almost inescapable, analysts said.
RBI had already raised rates 11 times in 18 months in its bid to contain inflation. There were also indications of RBI action in finance minister Pranab Mukherjee’s reaction on Wednesday to the distressing wholesale price index (WPI) data.
“It (inflation) is perilously close to double digit...RBI is also watching the situation like the government and collectively it would be possible for us to tackle the problem,” Mukherjee was quoted by agencies.
Inflation, based on the wholesale price index (WPI), rose to 9.78 per cent (provisional) in August on an annual basis from 9.22 per cent in July. The rate for August 2010 was 8.87 per cent.
The spate of turbulent news does signal a weakening in India’s overheated economy. Earlier this week, the Index of Industrial Production (IIP) numbers for the month of July signalled a downtrend in industrial growth. Industry grew at a dismal rate of 3.3 per cent, which was the slowest rate of growth in two years.
The Reserve Bank of India (RBI) may find itself in dilemma in the inflation vs growth debate. But given the unrestrained rise in prices, analysts are almost certain that the RBI raise rates further.
While growth is heading down, inflation continues to remain high and depreciating rupee could put further pressure. “I expect RBI to hike its policy rates by another 25 basis points before considering a pause in view of the heightened inflation and high inflationary expectations that prevail,” Crisil chief economist DK Joshi said.
“We hold a strong view that any rate high by RBI at this juncture will seriously impact growth which is already showing signs of fatigue,” Assocham said in a statement. This view was corroborated by the PHD chamber president Salil Bhandari.
“Going ahead, keeping in view the costs of high inflation and the fact that high inflation is adverse to sustained economic growth, there is an urgent need to address the structural supply constraints, particularly in agriculture sector, so that these do not hamper the growth potential of the economy”, he said.
On an annual basis food became costlier by 9.62 per cent. The price of onion, milk and potato soared by 45.29 per cent, 9.41 per cent, and 12.53 per cent. Wheat and pulses declined by 1.45 per cent and 4.26 per cent, respectively. Prices of non food articles (fibers, minerals and oilseeds) leaped by 17.75 per cent. The corresponding number for the month of July was 15.51 per cent.
Under fuel and power category, which has a 14.91 per cent weight in the index, petrol witnessed a rise of 23.23 per cent. Inflation in the manufactured product segment is a cause of particular concern to policy makers. The numbers here don’t augur well for the industry since they have been rising steadily. The overall rise here was 7.79 per cent. Food products became dearer by 8.05 per cent, whereas chemical and chemical products, rubber and plastic products rose by 8.48 per cent and 7.92 per cent.
Indranil Pan, chief economist Kotak Mahindra Bank said, “Broadly, we see the pressure on the manufactured side coming in from imported items. Basic metals, alloys and metal products and also chemical products have seen sizeable rises and the weights for these groups are also not insignificant.”
On the other hand, other items on the non-food manufacturing side, such as transport equipments and parts and machinery and machine tools have seen increases. The pressure from the imported inflation is unlikely to go away as global commodity prices have held relatively steady despite recession fears in the advanced economies, Pan said.
The inflation figures, coming just a couple of days ahead of the scheduled announcement of the Reserve Bank of India’s money policy on Friday, made a further interest rates hike almost inescapable, analysts said.
RBI had already raised rates 11 times in 18 months in its bid to contain inflation. There were also indications of RBI action in finance minister Pranab Mukherjee’s reaction on Wednesday to the distressing wholesale price index (WPI) data.
“It (inflation) is perilously close to double digit...RBI is also watching the situation like the government and collectively it would be possible for us to tackle the problem,” Mukherjee was quoted by agencies.
Inflation, based on the wholesale price index (WPI), rose to 9.78 per cent (provisional) in August on an annual basis from 9.22 per cent in July. The rate for August 2010 was 8.87 per cent.
The spate of turbulent news does signal a weakening in India’s overheated economy. Earlier this week, the Index of Industrial Production (IIP) numbers for the month of July signalled a downtrend in industrial growth. Industry grew at a dismal rate of 3.3 per cent, which was the slowest rate of growth in two years.
The Reserve Bank of India (RBI) may find itself in dilemma in the inflation vs growth debate. But given the unrestrained rise in prices, analysts are almost certain that the RBI raise rates further.
While growth is heading down, inflation continues to remain high and depreciating rupee could put further pressure. “I expect RBI to hike its policy rates by another 25 basis points before considering a pause in view of the heightened inflation and high inflationary expectations that prevail,” Crisil chief economist DK Joshi said.
“We hold a strong view that any rate high by RBI at this juncture will seriously impact growth which is already showing signs of fatigue,” Assocham said in a statement. This view was corroborated by the PHD chamber president Salil Bhandari.
“Going ahead, keeping in view the costs of high inflation and the fact that high inflation is adverse to sustained economic growth, there is an urgent need to address the structural supply constraints, particularly in agriculture sector, so that these do not hamper the growth potential of the economy”, he said.
On an annual basis food became costlier by 9.62 per cent. The price of onion, milk and potato soared by 45.29 per cent, 9.41 per cent, and 12.53 per cent. Wheat and pulses declined by 1.45 per cent and 4.26 per cent, respectively. Prices of non food articles (fibers, minerals and oilseeds) leaped by 17.75 per cent. The corresponding number for the month of July was 15.51 per cent.
Under fuel and power category, which has a 14.91 per cent weight in the index, petrol witnessed a rise of 23.23 per cent. Inflation in the manufactured product segment is a cause of particular concern to policy makers. The numbers here don’t augur well for the industry since they have been rising steadily. The overall rise here was 7.79 per cent. Food products became dearer by 8.05 per cent, whereas chemical and chemical products, rubber and plastic products rose by 8.48 per cent and 7.92 per cent.
Indranil Pan, chief economist Kotak Mahindra Bank said, “Broadly, we see the pressure on the manufactured side coming in from imported items. Basic metals, alloys and metal products and also chemical products have seen sizeable rises and the weights for these groups are also not insignificant.”
On the other hand, other items on the non-food manufacturing side, such as transport equipments and parts and machinery and machine tools have seen increases. The pressure from the imported inflation is unlikely to go away as global commodity prices have held relatively steady despite recession fears in the advanced economies, Pan said.
This article first appeared in the Financial Chronicle
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