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After poor factory output, India’s inflation nudging double-digit

Sep 15, 2011 2:52:38 PM - www.ft.lk

New Delhi, (IANS) India’s annual inflation rate for August inched closer towards double digits, fuelling speculation that the central bank may hike key rates again for the 12th time since January last year amid fears over slackening industrial output. 

The headline inflation, based on the wholesale price index, rose to 9.78 percent in August as compared to 9.22 percent in the previous month and 8.87 percent in August 2010, according to data released by the Commerce and Industry Ministry Wednesday. 
‘It is another bad news,’ Finance Minister Pranab Mukherjee told reporters here, when asked to comment on the price line. ‘Inflation has gone up from 9.22 percent to 9.78 percent, perilously closer to double-digit figure.’ 
The data came just two days before the Reserve Bank of India’s mid-quarter review of its monetary policy, scheduled in Mumbai Friday, and two days after data on industrial output showed the slowest growth in 21 months. 
The price index for primary articles rose 12.58 percent in August, while that for fuel and power went up to 12.84 percent, data on wholesale prices showed. The manufactured products index rose 7.79 percent, while that for food articles was up 9.62 percent. 
The figures for June were also revised upwards to 9.51 percent from the earlier projected 9.44 percent. 
Thus far, the central bank has not shied away from hiking key rates in a bid to tighten money supply and keep prices under check. The key policy rates have been hiked as many as 11 times since January 2010. 
But what has left policy-makers concerned is that despite such an aggressive monetary tightening, inflation has remained stubbornly high — near double-digit and much above what the central bank considers as a comfort zone of four-five percent. 
Analysts now largely expect the RBI to hike key interest rates by at least another 25 basis points when it takes up a review of the monetary policy Friday. 
 
‘All the inflation component numbers are way beyond the RBI’s comfort zone and more than its estimate of headline inflation averaging at 9 percent in the first half of the current fiscal,’ said Jay Shankar, chief economist – director, Religare Capital Markets. 
 
‘Crude remaining sticky remains the biggest risk to inflation outlook, with temporary domestic factors receding fast – thanks to a very good monsoon,’ he added. 
 
India Inc has been blaming the central bank’s hawkish stance for a decline in growth. 
 
India’s GDP growth declined to 7.7 percent in the April-June 2011 period, the slowest in six quarters, while industrial output slumped to 3.3 percent in July, the slowest in 21 months. 
 
‘Overall statistics reveal inflation since January 11 has consistently remained over 9 percent despite persistent rate hikes. We hope that the RBI pauses in the current cycle and reflects on alternate means,’ said Anis Chakravarty of Deloitte Haskins & Sells. 
 
‘It is important to observe this as part of a larger picture and identify specific pressure points in the economy. The fear that inflation is becoming systemic now is quite real.’

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