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No respite from high inflation rate in short-term

business Updated: Jun 27, 2008 23:07 IST
HT Correspondent
HT Correspondent
Hindustan Times
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As expected, inflation continues to remain in double digits, as do worries about its dampening impact on growth and the common man’s livelihood.

The latest update from the government on Friday showed the wholesale price-based inflation rate climbed to a new 13-year high of 11.42 per cent.

Experts do not rule out more monetary tightening measures from the country’s central bank as policy makers increasingly tilt to trade off some growth in favour of lower inflation.

There are no signs that the inflation rate would come off anytime soon, given that crude oil – which has contributed the most to price spikes around the world – is scaling a new peak in the global market with each passing week. On Friday, it rose to an all-time high of $142 per barrel.

Credit rating agency Moody's said the inflation rate in India would ease to around 8.5 per cent by the year-end due to monetary tightening and duty cuts.

Earlier, both Finance Minister P Chidambaram and Commerce Minister Kamal Nath have conceded that inflation would stay in double digits for a couple of months.

Analysts expect the Reserve Bank to bring more measures.

“The aim (of lower inflation) could be achieved through some more tightening of rates or through prudential guidelines such as increasing risk weightage for sectors experiencing sharp growth,” said Narmarat Padhye of the IDBI Gilts.

Economies across the Asian region are looking to monetary tightening.

“Central banks are already more hawkish, as inflation became a bigger problem in the region.Interest rates should rise around the region,” said Yiping Huang, a Hong Kong-based analyst with Citigroup Global Markets, said.

Earlier this week, the RBI raised the rate at which it lends to commercial bank to 8.5 per cent from 8 per cent. It also increased the cash reserve ratio, the portion of deposits that banks must hold in reserves, to 8.75 per cent from 8.25 per cent. Those measures have already prompted several banks to increase lending rates.

Rising interest rates will surely dampen consumption demand and drive down sales of all such things that are driven by loans – automobiles, consumer goods and real estate being the most vulnerable.