Inflation touches a 13-yr high at 11.05%

Interest rates are set to go up and a further slowing of the economy looks imminent, reports G Choudhury. What it means for youWhat is driving inflation

As feared, inflation has surged to double digits, and a reversal is unlikely to happen soon.

Interest rates are set to go up again and a further slowing of the economy looks imminent, as will be some tough measures from the government and the country’s central bank.

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According to data released on Friday, the wholesale price-based inflation rate touched a 13-year high of 11.05 per cent in the week ended June 7, driven by a steep hike in oil prices ordered by the government earlier this month.

Experts said the inflation rate could remain in double digits for several months, as higher oil prices cascade through other such sectors as transportation.

“These are indeed very difficult times,” Finance Minister P Chidambaram said. “The government is aware of the difficulties… we need to look at measures on both demand and supply sides.”

Shortly thereafter, the government announced subsidised sale of edible oil through ration stores across at least 15 states.
Still, household budgets will be under pressure, and for millions of home loan borrowers, the pinch will only get worse as their loans get costlier to service.

Most bankers expect the Reserve Bank India to increase its key lending rate ahead of the July 29 review of the credit policy, and some said the hike would be more than expected. Earlier this month the RBI announced a surprise hike, from 7.75 per cent to 8 per cent, in the rate at which it lends to commercial banks in the short term.

“We are not looking at another 25 basis-point ( 0.25 percentage point) hike (in repo rate). We are looking for more,” said A Prasanna at ICICI Bank.

If that happens, banks will be forced to increase interest rates on home loans and other finances, which, in turn, could hurt the broader economy by slowing new investments.