Course correction now

The knock-on effects of the fuel price hike are showing up in inflation data. Rate cuts may be some way off.

india Updated: Oct 15, 2012 22:44 IST
Hindustan Times

Wholesale inflation climbed to 7.81% in September after the government raised diesel prices to control its ballooning fuel subsidy bill. The 4 percentage point spurt in the country’s energy prices is the immediate impact of the politically sensitive decision that led to a rupture in the ruling UPA and widespread street protests. The knock-on effects will show up in inflation data over subsequent months as higher diesel prices raise input costs in transport, farming and industry. Rough estimates put the impact of a 14% hike in diesel price as pushing the wholesale price index up by around two-thirds of a percentage point.

The Reserve Bank of India (RBI) will be looking closely at the September data for signs of easing pressure on the price line before it takes a call on interest rates later this month. Since April, when it lowered overnight interest rates for banks, monthly wholesale inflation has stayed above 7.5%. Over this period, food prices have decelerated from 10.92% in April to 7.86% in September. But inflation in manufactured products has been on a secular uptrend from 5.27% to 6.26%. Core inflation — minus the more volatile food and energy prices — is what central bankers track for signs of reviving demand.

The government would like an interest rate cut to shake the economy out of its torpor. The gross domestic product grew a paltry 5.5% in April-June, with the slowdown cutting across agriculture, industry and services. Finance minister P Chidambaram hopes his assurances of fiscal correction will convince the RBI to cut interest rates that have choked productive investment. The RBI has repeatedly warned the government that unless it controls expenditure, principally subsidies like those on diesel, the prospects of a lower interest rate regime diminish. The October 30 review of credit policy will reveal whether the central bank is buying the government’s argument.

First Published: Oct 15, 2012 22:42 IST