Inflation spiked to a 13-month high of 8.56% in January from 7.31% in December on the back of a broad-based increase in prices. This, economists said, points to a demand revival and could prompt the Reserve Bank to raise interest rates in its April policy review.
But the rising inflation will force finance minister Pranab Mukherjee to play his cards carefully in the Union Budget on February 26, as any tax hikes to roll back the fiscal stimulus would push prices up. In any case, the wholesale price index (WPI) inflation is expected to go into double-digits by March 2010 and bankers expect any rate hike from RBI to happen only post-Budget.
Economists say data shows revival in demand that could prompt the central bank to go for rate hike. China on Friday raised bank reserve requirements for a second time in two months. Inflation has already surpassed the RBI March-end target of 8.5%. Any increase in fuel prices would only add to rising prices.
But higher-than-expected government borrowing in the Budget might hold off the RBI from aggressively raising rates as it would push up borrowing costs. The government on Monday also revised up the inflation number for November to 5.6% from 4.8% provisional estimate-indicating that prices are rising faster than captured in the provisional data.
Inflation rise was driven by a 17.4% jump in food prices,while expansion in manufacturing prices picked up to 6.55% from about 5% in December, signaling that inflationary pressures were spreading to other sectors of the economy .Manufactured-price inflation has accelerated the most in 13 months.Sugar prices climbed 58.96% in January, while pulses costs rose 45.64%, the data showed. Costs of potatoes jumped 53.39% and the indexof oil increased 6.9%.
The RBI has already increased the cash reserve ratio, the slice of deposits banks need to keep with the RBI, by 75 bps to 5.75% last month-- the first increase since August 2008. Subbarao had said that a reversal of monetary expansion cannot be `effective' unless there is also a `roll back of government borrowing'. The government has projected the fiscal deficit to touch a 16-year high of 6.8% in 2009-10.
But the rising inflation will force finance minister Pranab Mukherjee to play his cards carefully in the Union Budget on February 26, as any tax hikes to roll back the fiscal stimulus would push prices up. In any case, the wholesale price index (WPI) inflation is expected to go into double-digits by March 2010 and bankers expect any rate hike from RBI to happen only post-Budget.
Economists say data shows revival in demand that could prompt the central bank to go for rate hike. China on Friday raised bank reserve requirements for a second time in two months. Inflation has already surpassed the RBI March-end target of 8.5%. Any increase in fuel prices would only add to rising prices.
But higher-than-expected government borrowing in the Budget might hold off the RBI from aggressively raising rates as it would push up borrowing costs. The government on Monday also revised up the inflation number for November to 5.6% from 4.8% provisional estimate-indicating that prices are rising faster than captured in the provisional data.
Inflation rise was driven by a 17.4% jump in food prices,while expansion in manufacturing prices picked up to 6.55% from about 5% in December, signaling that inflationary pressures were spreading to other sectors of the economy .Manufactured-price inflation has accelerated the most in 13 months.Sugar prices climbed 58.96% in January, while pulses costs rose 45.64%, the data showed. Costs of potatoes jumped 53.39% and the indexof oil increased 6.9%.
The RBI has already increased the cash reserve ratio, the slice of deposits banks need to keep with the RBI, by 75 bps to 5.75% last month-- the first increase since August 2008. Subbarao had said that a reversal of monetary expansion cannot be `effective' unless there is also a `roll back of government borrowing'. The government has projected the fiscal deficit to touch a 16-year high of 6.8% in 2009-10.
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