Up, Up and Away! There Go The Prices!

• Monday, February 15th, 2010

The Reserve Bank of India is under severe pressure to hike interest rates, as January data reveals wholesale price index-based inflation at a 15-month high of 8.56%. Economists are divided on the issue whether RBI would raise the rates immediately.

Bad news brought on by the latest data is spreading of the effects of inflation beyond food items. Manufacturing sector is the latest victim with machinery and chemicals being the worst affected.

RBI forecast was 8.5% for the fiscal ending in March. With inflation soaring past this figure in January itself, it may even reach double-digits by March end. In case the proposed price hike for petroleum fuels is implemented, the result may be more disastrous.

The recent development is boosting the importance of Union Budget presentation due on 26 February. Even as the probability of double-digit inflation is high, economists are optimistic about the outcome in the long run. Predictions are that the inflation would peak during coming July and display waning tendencies thereafter.

Meanwhile, projection for February is anywhere in the range of 9 – 9.5%. Experts point out that the spike in inflation rate during January was mostly from runaway food prices, fueled by rise in the prices of manufactured goods.

The interest rate hike, touted as a solution to contain inflation is double-edged, according to most economists. Its success in reining in inflation depends on the timing of its implementation. As the inflation has spread to other sectors, a rate hike is projected as a viable solution and hence inevitable.

RBI had said last week that the rates would be reviewed only during RBI’s next policy review scheduled in April.

The stock market reacted to the new data by shedding 114 points (BSE’s Sensex) to close at 16,038.85.

Share and Enjoy: