As India's food inflation rate breached double-digit levels again, touching 10.05% for the week-ended August 20, the government and the Reserve Bank of India (RBI) are facing a major challenge: policy options appear to be fast running out on a win-win solution in the trade-off between growth and prices.
The central bank has maintained that sustainable solutions to lower inflation and higher trend growth warrant adequate supply-side response from the government.
The government can consider duty cuts in essential commodities to shore up supplies, but that will entail forgoing tax revenues, which in turn,will likely upset the fiscal deficit targets.Finance minister Pranab Mukherjee on Thursday termed the inflation rate as "disturbing," obliquely hinting that the government may not be averse to taking measures to boost supplies.
The RBI, which will present its mid-quarter monetary policy review in September, has raised interest rates by 11 times in the past 16 months.
"The latest GDP details are supportive of another rate hike by the RBI in September," said Rajeev Malik, senior economist at brokerage CLSA, Singapore.