Indian Economy : Rising Inflationary Pressure

Food inflation in India rose 9.01% in the week ended May 28, 2011, stoking fears of further policy tightening by RBI.

Led by sharp spike in prices of food articles, mainly fruits, India’s food inflation, as measured by the Wholesale Price Index (WPI), surged 9.01% on a year-on-year basis in the week ended May 28, 2011, as the latest data from the government shows. The annual food inflation had stood 8.55% during the preceding week. The latest figure is also the highest in the last two months since March 26 when it had stood at 9.18%. Fruit prices, which recorded a jump of nearly 31%, y-o-y, milk prices, which rose 8.5%, and egg, meat and fish, which became expensive by 7%, contributed to the rise in the annual food inflation. Cereals, which grew 5.8% and a jump of 14% in onion prices too pushed annual food inflation to jump to its two months high level.

The latest inflation figure stokes fear that interest rates would rise higher as banks respond to belt tightening by the central bank. The RBI has raised repo rate, its key lending rate, by 250 basis points to 7.25 per cent beginning March 2010 which has seen cost of consumer loans such as car, personal and home loans head higher, thus raising EMIs for retail borrowers.

With no let up in inflation rates, further monetary tightening by the central bank remains a possibility. The apex bank is scheduled to meet next week on June 16. Meanwhile, with the government under pressure to raise prices of petroleum products to meet its fiscal deficit target of 4.6% of GDP for the financial year 2011-12, hope of any let up in inflation seems a distant possibility. Yet with forecast of a normal monsoon and reports of a bumper crop this year, hope of a moderation in inflation rates still floats.