Inflation at 19-month high

Inflation rose at a faster-than-anticipated pace to shoot past the double digit mark in May, adding to the government’s dilemma over freeing motor fuel pricing and raising the question whether Reserve Bank of India will consider hiking key rates.With government insisting inflation will soon begin to plateau, and concern over a rate hike hurting the recovery, RBI might still remain cautious in its in actions. But the call would become more difficult to avoid, particularly if inflation spreads more rapidly to the non-food sector.
Officials point out there is no final wisdom on how much of a rate hike will prove a growth decelerator, but though the central bank will mull its options before its scheduled July review, it might just wait a while longer.Government data pegged overall inflation at 10.16% in May, the highest in the last 19 months and indicating that impact of high food prices is spreading to manufactured goods as well. The latest data also revised upward the final inflation figure for March to a bit over 11%, up from the provisional 9.9%. Inflation had peaked at 10.72% in the last week of October 2008.
The inflation figure follows last week’s data on factory output matching its fastest pace in 15 years at 17.6%, indicating that Asia’s third largest economy is facing inflationary pressure as it picks up growth momentum. One of the key factors for such a situation is food inflation, which has remained at the enhanced level of 16.49%, though it declined marginally from 16.87% in the previous month.
Finance minister Pranab Mukherjee told reporters in Patna he was not in favour of altering interest rates right now. This found echo in the views of several analysts who said there was no need for RBI to make haste now that even the markets seem less worried over the Eurozone debt crisis. Instead, the RBI may take “baby steps” to tighten money supply rather than go for a full-fledged rate hike.