Chances of any immediate cut in interest rates faded on Friday with the government reporting a further spike in prices that have driven the inflation rate to a new nine-month high.
Official data showed that wholesale price index rose by a worrisome 5.11 per cent in the week ended March 1 from a year ago, up from the previous week’s 5.02 per cent.
“Inflation is on the rise. It is a matter that causes worry to any government,” Finance Minister P. Chidambaram told Parliament as the news came in.
“When inflation is on the rise, all of us should be concerned,” he said, adding the government will take all such fiscal steps necessary to keep prices under check.
Chidambaram didn’t elaborate on the measures that could follow, but experts said mounting price pressures would prevent the Reserve Bank of India from easing its monetary policy.
Over the past two years, the central bank has repeatedly increased interest rates in bid to curb inflation. Those moves have been unpopular among many people, including home loan buyers and industries looking to borrow money from banks to invest in new projects.
In recent months, Chidambaram has persuaded some banks to reduce interest rates on home loans and consumers had hopes more banks would follow suit in coming months. That appears unlikely to happen now.
On Friday, the yield rate on the 10-year government bond – a key indicator of where interest rates are headed — eased by two basis points to 7.62 per cent after the release of the data, but then inched back up to 7.64 per cent.
"Given the developments in world markets of food and commodity prices, 2008 is increasingly looking to be a more difficult year. Interest rates are likely to be stable," said Saumitra Chaudhuri, a member of the Prime Minister's Economic Advisory Council.
The latest spike in inflation has come on the back of rising food costs and global crude prices, and that is why it is worrying the government.
"The pressure on inflation is well understood, but it has reached a worrying level. In case, the wheat crop is not good, India might to have resort to imports that would put further pressure on the price situation as global wheat prices are ruling at high levels," D.K.Joshi, principal economist of credit rating and consulting firm Crisil, said.
There are chances that the country could face general elections earlier than May, when the tenure of the present government ends. High inflation, especially in food products, could become politically detrimental for the ruling coalition.
"We seem to be heading towards higher levels of inflation, particularly post-March, when the base effect support withers out," commented Gaurav Kapur, economist at ABN AMRO Bank in Mumbai.