Inflation nears double digits, rate hike likely | business | Hindustan Times
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Inflation nears double digits, rate hike likely

business Updated: Sep 15, 2011 02:15 IST
HT Correspondent
HT Correspondent
Hindustan Times

India’s inflation rate raced towards the worrisome double-digit levels, heightening speculation that the Reserve Bank of India (RBI), despite a slowing economy, may further raise interest rates to cool prices in its mid-quarter policy review on Friday.

So, expect your EMIs on loans to go up.

The wholesale price index (WPI)-based inflation, India’s most watched cost of living index, stood at 9.78% in August — the highest in 13 months — fuelled by costlier food, fuel and manufactured products.

Factory output growth in July grew by 3.3% — the slowest in 21 months — mirroring signs of an imminent industrial slowdown. The rising input costs and costlier borrowings are squeezing corporate profitability, forcing them to defer investment plans.

“It (the inflation rate) is perilously close to double digits... the RBI is also watching the situation like the government. And collectively, it would be possible for us to tackle the problem,” finance minister Pranab Mukherjee said.

Mukherjee attributed the rise in the rate of prices to global factors. "Of course, all over the world it was expected that inflationary pressure would rise in all groups, including the manufacturing (segment)," he said.

The RBI has raised interest rates by 11 times in the past 16 months to cool prices and experts said the central bank may not be done yet with the rate hikes despite strong signs of slowdown in the domestic economy.

But the slew of fiscal and monetary steps already taken to cure inflation has not only failed to tame prices, but also impacted growth and hurt investments.

Rajeev Malik, senior economist at broking and research firm CLSA, Singapore, however, said, “The worsening global backdrop is an important factor that cannot be ignored by the RBI. But the inflation data still justify at least one more rate hike.”

A higher repo rate – at which banks borrow from the RBI -- raises banks’ borrowing costs and prompts them to raise interest rates on the home, auto and corporate loans.

Indraneel Pan, chief economist, Kotak Mahindra Bank, said, “Despite the recent softness on the industrial production side, we would expect the RBI to raise the repo rate on Friday.”

Petrol price to rise further

State-owned oil firms plan to raise petrol prices by R2 to R3 a litre as the rupee touched a two-year low against the dollar, increasing the import costs of crude. But diesel may be spared even though the companies have been losing more than Rs6 on every litre of diesel sold.