High inflation talk looms again, so does a rate hike

Officially, the benchmark inflation based on wholesale prices has turned negative. But high inflation seems to be on the horizon, with economists seeing the figure rising to 5-6% by the end of 2009, up from the current minus 1.6% and a steep 12% in the third quarter of 2008.

Officially, the benchmark inflation based on wholesale prices has turned negative. But high inflation seems to be on the horizon, with economists seeing the figure rising to 5-6 per cent by the end of 2009, up from the current minus 1.6 per cent and a steep 12 per cent in the third quarter of 2008.

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Whats’s more, RBI may send interest rates up again.

“By the end of this calendar year, we could be looking at energy price inflation of about 15 per cent, primary articles inflation at 4 per cent and manufacturing inflation at 4 per cent. Given their respective weights in the wholesale price index (WPI), this works out to be a 5.5 per cent headline rate of inflation, a big upward revision from our previous zero per cent forecast and well above consensus expectations,” said Robert Prior-Wandesforde, economist with Hongkong and Shanghai Banking Corporation (HSBC).

The projected 5-6 per cent inflation is unlikely to be the peak. WPI inflation is expected by some to even reach 7-8 per cent by March 2010, double the RBI’s 4 per cent target.

Nikhilesh Bhattacharyya, Economist with Moody’sEconomy.com in Sydney said the RBI finds itself in a tricky position.

“Higher interest rates could jeopardise the recovery but not raising them also carries risk. It is doing something unorthodox by keeping the short-term policy rate well above zero but trying to lower long-term rates via government bond purchases,” he said.