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Inflation spiral may force RBI to tighten money supply

business Updated: Apr 15, 2010 19:44 IST

PTI
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Wholesale prices based inflation touched nearly 10 per cent in March as the impact of food inflation spread to other sectors, which economists said strengthens the case for RBI to tighten money supply.

Finance Minister Pranab Mukherjee today said that inflationary pressures will remain till June and prices will start cooling down only after the harvesting of the rabi crop (winter) is complete.

The wholesale price-based inflation was at 9.89 per cent in February and 1.20 per cent in the March of 2009.

It was also much higher than the RBI's projection of 8.5 per cent by the end of last fiscal.

Economists say, despite the moderate rise, the RBI will tighten money supply to cool down the surging prices as there is not much difference between 9.9 per cent and 10 per cent. RBI will on Tuesday announce its annual monetary policy.

"The difference is academic. What is the difference between 9.9 and 10 per cent? This is a preliminary figure, the revised figures may just show 10 per cent," Crisil principal economist D K Joshi said, adding that RBI would raise rates at its annual policy.

Higher interest rates could temper demand for loans and could lead to reduced consumer spending and that could in turn cool demand for goods, resulting in reduced prices.

Fears of a rate hike sent the stock markets tumbling with the benchmark Sensex shedding over 180 points.

Prime Minister's Economic Advisory Council (PMEAC) member Suman K Bery also said, "It is important for them (RBI) to signal concerns for inflation. I do expect some tightening in Tuesday's monetary policy."

Barclays Capital expects RBI to hike key short-term rates by 50 basis points, after effecting 25 basis points increase in these rates last month.

"Of course the apprehension was that it may reach the double digit figure. So it has been moderated to some extent but you will have to see that till the month of June, this pressure will continue," Mukherjee told reporters here.

Inflation remained largely concentrated on food items, particularly pulses and sugarcane. For the week ended April 3, however, food inflation inched down to 17.22 per cent from 17.70 per cent in the previous week.

For March, food inflation stood at 16.65 per cent with prices of pulses rising by 31.40 per cent year-on-year, that of milk by 17.64 per cent and petrol by 16.82 per cent.

Prices of certain other manufactured items also increased during the month. Cotton textiles prices rose by 13.92 per cent, while chemical products became dearer by 8.14 per cent.