Inflation at 13-mth high adds to RBI dilemma

Inflation rose to a 13-month high to draw closer to double digit mark in August, posing a dilemma before the Reserve Bank of India (RBI) to go for another rate hike to tame price pressures or press a pause button to boost growth in its monetary review on Friday. A number of experts, including those in the finance ministry, have called on the central bank to halt its rate hiking spree as it is hurting economic growth.

Inflation climbed to 9.78 per cent in August from 8.87 per cent in the corresponding month of last year and 9.22 per cent in July 2011 on the back of food prices heading northwards.

“It is perilously close to double digits... RBI is also watching the situation like the government and collectively it will be possible for us to tackle the problem,” finance minister Pranab Mukherjee said.

However, chief economic advisor Kaushik Basu had yesterday suggested RBI should think out of the box to tame inflation as its sustained monetary tightening had stifled growth but is not having an impact on inflation. Today, he said, “There is no black and white answer... RBI will have to balance out these two — controlling inflation and not dampening growth too much.” Basu said inflation is likely to remain choppy till this year, and start moderating after December.

Earlier in Kolkata, the finance minister had also hoped that the central bank will not continue hiking policy rates.

In fact, Fitch Ratings Director Devendra Kumar said RBI’s monetary stance is not having an impact on inflation due to loose fiscal policy by the Centre. The Centre’s fiscal deficit has already touched 7.88 per cent of GDP in the first quarter of this fiscal. The finance ministry is however quite hopeful that it will rein in fiscal deficit at 4.6 per cent of GDP this fiscal, as is targeted in the Budget for 2011-12.

Consultancy firm Deloitte, Haskins & Sells director Anis Chakravarty said high inflation numbers raise the question whether the RBI’s monetary policy is at all having an effect or in reality curbing economic growth. “We hope that the RBI pauses in the current cycle and reflects on alternative means to address this issue,” he said.

Economic affairs secretary R Gopalan also said while RBI’s rate hiking spree had anchored inflationary expectations, it had limited success in lowering inflation rates to acceptable levels. Food articles saw a major climb, as the inflation scaled to 9.62 per cent in August versus 8.19 per cent last month. Onions seemed all set to make people cry as its rate of price rise leaped to 45.29 per cent from 26.96 per cent during the period.

Price rise in onions is gaining pace and is rising consistently since March when the inflation in onion stood at just 4.55 per cent. Potato inflation almost doubled and mounted to 12.53 per cent in August against 6.21 per cent in July.

Inflation in manufactured products also rose to 7.79 per cent in August from 7.49 per cent in July.

It has been over 7 per cent for four months in a row. Here also, inflation in processed food items rose to 8.05 per cent in August from 7.55 per cent in July.

RBI has already hiked policy rates 11 times since early 2010 to tame inflation, but has in fact moderated economic growth.

India’s economic growth fell below 8 per cent for the second quarter in a row at 7.7 per cent during April-June, 2011 against 8.8 per cent in the first quarter of the last fiscal.

Industrial growth also declined to 21-month low of 3.3 per cent in July against 9.9 per cent in the same month last year.