Inflation may hover around 6%: Rangarajan

Rangarajan also said there is a need to raise retail prices of fuel, but said the government is posed with a dilemma on account of the impact such a move would have on inflation. "Some adjustment of the retail prices is needed because crude is mostly imported and its cost has gone up. There is a limit to which oil bonds can be given. We are on the horns of a dilemma."

A moderate increase in retail prices of fuels is likely next week once a final decision on a proposed set of measures like duty cuts, further bond issue, upstream sharing and a moderate price hike are taken. Diesel prices may be spared or raised only marginally keeping in mind the impact such an increase would have on inflation. Petroleum ministry officials today said a retail price hike of petroleum products seems inevitable and added that a draft proposal for the consideration of the cabinet will be prepared by later today.

In the event that the price of petrol goes up by Rs 2 and that of diesel by Rs 1, it will directly impact the wholesale price index for the fuel group, pushing it up by 20 to 25 basis points. Petrol and diesel have a weight of nearly 3 per cent in the WPI. A 25 bps rise in the index implies that the WPI inflation rate reported today at 7.82 per cent for the week ended May 10, would have been higher at 7.96 per cent. In addition, a fuel price hike will also push up transportation and energy costs, leading to an across the board increase in prices of commodities, impacting the index in turn.

Rangarajan, who spoke to reporters on the sidelines of a conference organised by National Institute of Public Finance and Policy, exuded confidence that industrial production growth will be higher than 8 per cent in 2008-09. He added that the 3 per cent growth in the Index of Industrial Production in March this year, was a blip due to the base year effect as the growth rate was very high in the corresponding month last year.

"We still think that gross domestic product growth rate in 2008-09 can be close to 8 per cent. Correspondingly, the industrial production could be a little higher than that," Rangarajan said.