Another rate hike likely, inflation may go up further

Costlier diesel and LPG will weigh on inflation, which may further go up to 9.2- 9.7% in June, exerting pressure on the RBI to go in for another round of interest rate hike.

The inflation numbers for June will be released tomorrow.

Economists said the full cascading impact of the sharp raise in diesel, LPG and kerosene prices announced on May 24, would be visible from July onwards when inflation could touch the double-digit mark.

Despite slowdown in the factory output and industry making hue and cry over rising interest rates, the economists said the RBI is left with very little choice than to go in for yet another round of interest rate hike.

The Reserve Bank is scheduled to undertake quarterly review of credit policy on July 26, when it may undertake a rate hike of 25-basis points. Its benchmark rate has already gone up by 250 basis points (2.5 percentage points) since March 2010.

"The hike in fuel prices, especially diesel, has increased supply side constraints. The impact will be felt on the headline inflation and we expect it to be between 9-9.5% in June," Deloitte, Haskins and Sells director Anis Chakravarty said.

He said overall inflation is likely to remain elevated for some time and could breach the double-digit mark in July.

"There is a fear that inflation may touch 10% in July. However, we expect the pressure to moderate by the third quarter," Chakravarty said.

Asked about RBI's likely course of action, he said: "It is true that rate hikes have affected investment and slowed down industrial growth. However, RBI's primary focus has been and will remain inflation control and so another hike in rates of 25 basis points is likely on July 26".

Headline inflation stood at 9.06% in May. It has been above 8% since January 2010.

RBI has hiked its key policy rates ten times since March last year to curb demand and tame inflation. However, increase in rates has led to a fall in investments and the industry has blamed this for slowdown in factory output.

Industrial growth fell to a nine-month low of 5.6% in May, mainly on account of poor performance by the manufacturing sector, which has been hit by falling investments.

"We expect June inflation at 9.2%. The rise will be mainly on account of the fuel price hike and the segment most affected will be manufactured items," Crisil chief economist DK Joshi said.

While expensive food items was the main contributor to inflationary pressure in 2010, inflation in manufactured items has started to rise during recent months and stood at above 7% in May.