Rate hike may boost inflation

Rate hike may boost inflation
ENS ECONOMIC BUREAU

New Delhi, July 23: The Reserve Bank of India's recent hike in bank rate by one percentage point is anticipated to add to the inflationary pressure and keep the annual rate of inflation based on the wholesale price index (WPI) to over 6 per cent level.

The stabilisation of the money supply through the interest rate hike, would mean lesser money chasing higher demand in the coming months and hence bring about a demand-led inflation. "The move by the government to stimulate pick-up in the gilt-edged securities will also mean a tighter fund availability for investments from the banks," said DH Pai Panandikar, a leading economist with RPG Foundation.

Said BB Bhatacharya of Institute of Economic Growth: "the inflation rate (WPI) will rally between 6 to 7 per cent for some time now." In fact, experts point out that the large part of the inflationary pressure has been on account of the fuel price hike. And amongst the fuel prices, it is primarily the petroleum and electricity prices which have contributed to the 6 per cent level at which the annual rate of inflation has been pegged at for the last few weeks. "Fuel price hikes resorted to by the government in March has led to almost half of the inflation that we have today," said Panandikar.

Seen at a disaggregated level, out of the 6 per cent inflation rate as much as 3 per cent of the inflation has been solely due to the fuel price hike such as petroleum and power. Fuel prices have risen by about 42 per cent over the last four months while electricity prices have shot up by 15 per cent due to various electricity tariff hikes by various states.

Incidentally, the annual rate of inflation, for the period July 8 is also reported to be static at the previous week's mark of 6 per cent and this again is a provisional estimate. The final estimates would show a higher level.

To add to it, there has been a fall in the industrial growth for the latest recorded period June. Even after allowing for some complacency for the redistribution of the weightages in the sector the fact remains that with higher interest rates the funding for investment for this sector will tighten. "With the dotcom and IT companies mopping away most of the funds, there is very little left for the other sectors," said Panandikar.

Apart from fuel prices, a major contribution in the inflationary spiral has been on account of the primary articles under which the non-food items has been showing trends of hardening even as price spurts for the food articles has witnessed an arrest.

"Out of the total, two-thirds of the inflation has been on account of primary articles," said A Lahiri, a leading economist. A sharp surge in prices of fuel, light, power, oil and lubricants (POL) has been the central contributor to the rise in the annual rate of inflation at the wholesale level in the past few weeks. For the last four weeks for the major group fuel, power, light and lubricants has been on an upswing showing almost 5-6 per cent jump in the index for the major group following the hike in petroleum price by the government on March 22. Yet another round of price hike of the international crude oil prices is not ruled out if the prices of crude is not contained within the OPEC stipulated limits in the coming weeks.

Inflation remains static at 5.92 pc
New Delhi: Annual rate of inflation based on the wholesale price index (WPI) remained static at 5.92 per cent during the week ended July 8, according to provisional figures.

The rate was at 1.99 per cent a year ago. Inflation has been moving down in the past few weeks mainly on account of decline in prices of agricultural products following the onset of monsoon. During the week, the index for primary articles, which includes mainly agricultural products rose by 0.4 per cent to 163.9 (P) from 163.3 in the week ended July 1. The index for all commodities (1993-94=100) stood unchanged at the previous week's level of 152.2 (P). According to the latest data, the wholesale price index and the annual rate of inflation for `all commodities' for the week ended May 13, 2000 remained static at the provisional level of 151.7 and 6.38 per cent respectively.