The Union Budget for 2012-13 announced last week has triggered a new round of inflationary expectations — and with it, chances of an interest rate cut from the Reserve Bank of India (RBI) in the near future seems to have reduced.
With the budget sending the signals, oil companies are considering a substantial increase in the price of automobile fuels and cooking gas — both of which are set to have a knock-on effect across the economy.
A two percentage point hike in excise duty for most manufactured goods to 12% and an increase in the number of services being brought under the service tax net are also expected to fan prices up.
What this means is the RBI’s inflation watching will intensify, and there is no sign of the inflation easing yet even from the last round as expected. “RBI is set to hold on to rates for a while now… it would not wish to take any risk at this juncture,” said DK Joshi, chief economist at credit rating agency Crisil.
Retail inflation for the month of February was 8.83% up from 7.65% in January. Headline inflation of the wholesale price index (WPI)-based inflation was at 6.95% in February after falling to a two-year low of 6.55% in the previous month.
Rajiv Kumar, secretary-general of industry chamber Ficci, told Hindustan Times that the budget carried no specific announcement on fiscal consolidation. “A rate cut is less probable now than what it was two weeks ago,” he said.
However, finance minister Pranab Mukherjee on Monday said inflation will fluctuate for a couple of months and will stabilise after that. “So I do hope that after a couple of months it will stabilise,” he told reporters after chairing the RBI’s central board meeting here.