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Interest rate hikes loom as inflation stays above 9%
Published on 15 Jun. 2011 11:03 PM IST
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There is no respite from rising prices and further rise in interest rates, which may happen as early as Thursday.
Inflation remained stubborn in May and hovered above 9% providing further evidence that price pressure remains intact in the economy which may force the Reserve Bank of India to raise interest rates for the tenth time since March 2010, states TOI.
Government data released on Tuesday showed inflation, as measured by the wholesale price index, accelerated to 9.06% in May from 8.66% in April. The government also sharply revised the inflation data for March to 9.68% from the previously announced 9.04%, prompting analysts to say that the economy may face double-digit inflation in the months ahead.
Unlike past months, when inflation was mainly on account of higher food prices, now it’s the spike in manufactured product prices that is driving the price rise.
Soaring inflation has emerged as a policy challenge for the UPA government. The RBI has raised rates nine times since March 2010 and said it is ready to sacrifice some growth in the short term to calm price pressures. Higher interest rates have translated into increased borrowing costs and have moderated sales of cars as consumers postponed their purchasing decisions.
Finance minister Pranab Mukherjee said the hardening of core inflation (other than food, fuel and power inflation) posed some concerns and needs to be addressed but the easing of food inflation should help in moderating inflationary pressure in the economy in the months ahead.
But the chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, called for stronger monetary and fiscal action to tame inflation.
Moderating growth had fuelled speculation that the RBI may hold its fire on rates when it meets to review monetary policy later this week. But Tuesday’s inflation data may force it to raise rates by at least 25 basis points (100 basis points = one percentage point).
“We expect the RBI to hike the repo rate by 25 basis points on June 16. The May inflation data should convincingly eliminate the surprising -- but faint -- expectation of a possible pause by the RBI,” Rajeev Malik, senior economist at CLSA in Singapore said in a note.

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