Inflation surges to 9.06% in May, rate rise likely

Annual inflation once again breached the nine per cent mark this year in May, after an aberration in April, raising speculation that the Reserve Bank of India (RBI) may raise interest rates further, despite signs of slowing growth.

The wholesale price index (WPI) increased 9.06 per cent in May from a year earlier, faster than the 8.66 per cent rise in April, because prices of fruits, fuel and manufactured goods shot up, though the rate of food and fuel inflation fell. In May 2010, inflation stood at 10.48 per cent.

Since revisions are taking place frequently these days, there is no certainty that the WPI for April will remain below nine per cent when final figures come. The case in point is March inflation, revised to 9.68 per cent today from the provisional estimate of 9.04 per cent.

Food inflation, a headache for policy makers till a few months earlier, is declining. It eased to 8.37 per cent from 8.71 per cent in April and 16.68 per cent in January. Finance Minister Pranab Mukherjee said in a statement, “Food inflation has been continuously moderating and at 8.37 per cent, is now half of the level recorded in January. Other than fruits, inflation is moderating in all food items.”

Many had feared fuel inflation would go up after the rise in petrol price was factored in, but it was down to 12.32 per cent in May from 13.32 per cent in the previous month. Inflation in manufactured goods that has the highest weightage in WPI, increased to 7.27 per cent from 6.18 per cent in May. In fact, core inflation (inflation in manufactured items sans food products) was on an upswing.

Mukherjee said, “Core inflation is higher at 8.71 per cent in comparison to 7.93 per cent in April. We would keep a close watch on developments, both domestic as well as international, in the coming months and make appropriate adjustments as we go along.”

Economists believe RBI will raise repo and reverse repo (short-term lending and borrowing) rates by 25 basis points to arrest rising inflation. If this happens, it would be the 10th time that the central bank will be raising these rates since early 2010.

The RBI is due to meet on Thursday. Pointing out that the monetary policy cannot tame inflation alone, economists say the government has to take supply side as well as fiscal measures to cool it down.

“While I expect the RBI to resort to a 25 basis points rate rise in light of the stubborn inflation, besides focusing on monetary measures, there is very little that the RBI can do to address the current inflation scenario,” Deloitte Haskins & Sells Director Anis Chakravarty said.