Inflation crosses 9%, RBI could hike interest rates further

Resuming its upward climb, the headline inflation in May rose to 9.06% on costlier fruits, petrol and manufactured goods and heightened fears of another hike in interest rates by the RBI on Thursday.

Even as the increasing prices of essential items pushed up the inflation rate during the reporting month from 8.66% in April, a concerned government said that more steps could be taken in the coming months to tame price rise.

"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," finance minister Pranab Mukherjee said after the announcement of the May inflation numbers.

The experts, however, feel that the Reserve Bank, which has raised key policy rates nine times since March 2010, will go in for another round of monetary tightening at its mid-quarterly review slated for Thursday.

The RBI would try to balance the need to tame inflation and promote industrial growth, which has slipped to 6.3% in April from 13.1% a year ago.

"I think the RBI will probably look at the inflation issue more seriously and will take some action... (it) will probably decide to do in the context of the high level of inflation," Prime Minister's Economic Advisory Council chairman C Rangarajan said.

The inflation numbers for May also capture the increase in petrol prices by over Rs5 litre last month. Besides other items like cotton textiles in manufactured segments and some food articles like fruits, milk and egg, meat and fish also became expensive in May.

Inflation has been above 8% since January 2010. It has stayed above 9% since December last year and moderated to 8.66 per cent in April this year, before the latest rise.

Mukherjee, however, said the latest numbers are below the 10.48% recorded in May 2010 and said: "... the picture for the latest month is however mixed".

While food and primary inflation has declined, "core inflation (that is other than food, fuel and power inflation) continues to harden...this poses some concerns which will have to be addressed", he said.

Meanwhile the inflation for March has been revised upward to 9.68% from the provisional 9.04%.

"While the consistent rate hikes have affected investments and led to fall in growth numbers, inflation still remains RBI's major focus. So we think the central bank will raise rates by 25 basis points on June 16," Deloitte, Haskins & Sells director Anis Chakravarty said.

In May, prices of manufactured products, which have a weight of around 65% in the Wholesale Price Index (WPI) basket, went up by 7.27% year-on-year.

Fuel and power segment, with a weight of almost 15% in the basket, stood at 12.32% year-on-year during the period.

However, the rate hike of over Rs5 a litre in petrol prices by state-owned old marketing companies in mid-May had a visible impact, with prices of the item going up by 27.31% on an annual basis.

Commenting on the latest numbers, Planning Commission deputy chairman Montek Singh Ahluwalia said that inflation "is a problem (but) we still remain hopeful... It has gone up, which is not unexpected, because the preliminary indications said it would go up".