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Inflation soars, RBI may raise rates

business Updated: Jan 07, 2011 08:48 IST
HT Correspondent
HT Correspondent
Hindustan Times
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The bad news is getting worse. Food inflation for the week ended December 25 jumped four percentage points to 18.32% on the back of rising onion, tomato, egg, fish, meat and milk prices. This is its highest level in more than a year.

And the rising food bill could well be the thin end of the wedge. Food prices have a 14.33% wei-ght in the overall inflation figure. So, when the inflation rate is released on January 15, it is bound to be significantly higher than the 7.48% level last month.

That is bad news for all, because the RBI will be under pressure to raise key interest rates to control inflation.

If interest rates rise, consumer demand will fall and companies may hold back planned investments. Sharp spike

This is expected to rein in prices but growth rates in the broader economy could suffer. In December, the government had projected the economy to grow at about 9%. It grew at 8.9% in the April-October period.

Raised interest rates would also result in higher EMIs on home, car and personal loans, a cutback in non-essential consumption and a deflation of the overall buoyant mood in the country.

The price spike caught the government unawares.

Finance minister Pranab Mukherjee asked state governments to “urgently look into the supply management of items that are driving the current round of food inflation”.

But that may be easier said than done.

Experts have warned that global food and commodity prices could rise higher still in the wake of floods in Australia, drought in Argentina and extreme cold weather in Russia. This might result in a poor global wheat production this year.

A food price index developed by the United Nations’ Food & Agricultural Organisation reached its highest in December surpassing the previous peak of June 2008.

“It is an utter mistake to think that it is fully within the control of the government to move prices of food up and down,” the government’s chief economic advisor Kaushik Basu has said. The government has deferred a proposal to raise prices of diesel and cooking gas because this would have further stoked prices.

But with global crude prices inching towards $100 per barrel, its options could be limited.

“Inflation is high and food inflation is very high... we are not sure whether we have all the tools in hands to control food inflation. Some say we do, some say we don't (have tools to check price rise),” home minister P Chidambaram had said on Wednesday in New Delhi.