Inflation at 13-month high of 9.8%; big challenge for RBI

Driven by expensive food and manufactured items, inflation climbed to 13-month high of 9.78% in August suggesting that frequent interest hikes by Reserve Bank of India since March 2010 has proved ineffective to contain price rise.

RBI, which is scheduled to review interest rate policy again on Friday, faces a dilemma of sorts as the Indian economy is confronted with high inflation and sliding growth. It raised interest rates 11 times in last 18 months.
Inflation, based on the Wholesale Price Index, went up from 9.22% in July. The near double-digit inflation in August is highest since July 2010, when it was 9.98%.
"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," Finance Minister Pranab Mukherjee said.
Chief Economic Advisor in the Finance Ministry Kaushik Basu said "there is no black and white answer... and RBI will have to balance between controlling inflation and dampening growth."
Inflation for June has been revised upwards to 9.51% from the provisional estimate of 9.44%, according to official data released today.
In August food items on annual basis became expensive by 9.62%, driven mainly by rising prices of onion, fruits and potato.
Prices of manufactured products, which have a weight of around 65% in the WPI basket, went up by 7.79% during the month.
Among food items, onions became expensive by 45.29 per in August, while fruit prices were up 22.82%. Potatoes became expensive by 12.53%.
Among manufactured items, edible oil became dearer by 12.94%, tobacco product by 13.17%, cotton textiles by 16.86% and wood and wood products by 9.72%.
"No doubt the RBI is in a dilemma... inflation control remains its prime agenda and so we expect interest rates to go by another 25 basis points," Crisil chief economist DK Joshi said.
Industrial production fell to a 21-month low of 3.3% in July. The country's GDP growth also slipped to 18-month low of 7.7% in April-June period.
India Inc has said that the rising cost of credit has slowed down investment, thereby hurting growth.
Chairman and Managing Director of Corporation Bank Ramnath Pradeep said RBI is likely continue with its tight monetary policy and hike rates.
"If policy rates go up it will put pressure on banks to raise interest rates, both lending and deposit rates," he said.
This is the ninth consecutive month when inflation has stayed above the 9% mark.
Inflation in overall primary articles, which have a share of over 20% in the WPI basket, stood at 12.58% in the month under review.
Non-food primary articles, which include fibres, oil seeds and minerals, became dearer by 17.75%.
Inflation in the fuel and power segment stood at 12.84% year-on-year in the month under review.
Standard Chartered senior economist Anubhuti Sahay said there are not enough policies to ease supply side pressure and inflation is expected to remain high in near future.
However, she said that the moderation in growth "is not yet broad-based."
She felt RBI is likely to go in for another hike of 25 basis points in its key-policy rates. Before the interest rates peak, there could be yet another revision in October, Sahay said.
Besides, the local factors, high international commodity prices are adding to the problem.
Weakening of rupee against the US dollar is also a bad news for the policy makers grappling with inflation.
"The recent depreciation of the rupee relative to the US dollar would exert pressure on the prices of imported items... Accordingly, we expect the RBI to persist with monetary tightening and hike the repo rate by 25 basis points in the upcoming policy review, despite the sluggish industrial growth," ICRA economist Aditi Nayar said.
India imports around three quarters of its oil and gas from abroad and international commodity prices continue to remain elevated, despite the crisis in US and Eurozone. Also watch the accompanying video for CNBC-TV18's Latha Venkatesh's comments...