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The pinch begins to pain

The rate of inflation based on wholesale prices rose to a provisional 8.75 percent through the week-ended May 31, primarily on the back of rising food costs.
By Arun Kumar and Gaurav Choudhury | Hindustan Times, New Delhi
UPDATED ON JUN 13, 2008 09:34 PM IST

The spectre of double-digit inflation loomed large over the Indian economy as latest official data on Friday showed inflation rate spiking to a seven-year of 8.75 per cent. Analysts said they see fewer signs of a reversal of the trend anytime soon.

The rate of inflation based on wholesale prices rose to a provisional 8.75 percent through the week-ended May 31, primarily on the back of rising food costs. The latest number doesn't include the impact of the steep hike in fuel prices last week, which may add another percentage point to the inflation rate and will be captured in next Friday's.

Given that past inflation numbers have consistently been revised upward, the inflation rate might have already crossed the 10 per cent mark.

“Inflation is likely to accelerate to double digits," said Chetan Ahya, a Singapore-based analyst with Morgan Stanley. “We believe there are upside risks to inflation pressure on account of the recent pass-through of oil prices and depreciation in the rupee lately.”

Stung by skyrocketing global crude oil prices that had reached $135 a barrel last year, the government recently announced a Rs 5 a litre increase in petrol, Rs 3 on diesel and Rs 50 per LPG cylinder.

Experts believe this would directly add at least 0.50 percentage points to the inflation rate. The overall impact would be even bigger as high oil prices cascade through other economic sectors. Some experts estimate an indirect impact of about 0.40 percentage points.

“The revision in fuel prices will push up inflation by 0.95 percentage points taking into account direct and indirect impact. The indirect impact will be felt over the course of the next few months,” a research report prepared by credit rating and consulting firm Crisil said.

The price hike would also exert an upward pressure on prices of commodities due to higher transportation cost.

“A Rs 3 per litre rise in diesel prices would result in about 5 per cent higher transport cost,” SP Singh, senior fellow, India Foundation for Transport Research and Training said.

Analysts warned of adverse consequences of high commodity prices on the Indian economy. “The sharp rise in commodity prices is a serious risk to the Indian economy as it imports roughly 75 per cent of its oil needs,” said Vivek Ranjan Misra, Strategist, HSBC Bank.

Worried over the surge in inflation, the Reserve Bank of India on Wednesday raise the repo rate-- the rate at which the central bank lends to commercial banks in the short term — to 8 per cent from 7.75 per cent.

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