Pranab Mukherjee talks of appropriate steps in the coming months

In line with the Reserve Bank's projection on price rise for the current fiscal, headline inflation resumed its northward march to breach the 9-per cent mark in May even as the government expressed concern and indicated that appropriate steps would be taken in the coming months to contain the inflationary spiral.

The official data on the Wholesale Price Index (WPI) released here on Tuesday showed that headline inflation surged to 9.06 per cent in May from 8.66 per cent in April and the main drivers of the price spiral were food and non-food items such as fruits, milk, petrol and manufactured goods which turned costlier.

In its monetary policy announcement for 2011-12 on May 3, the RBI had forecast overall inflation hovering at an average of 9 per cent during the first half of the fiscal year before moderating to about 6 per cent (with an upward bias) by March, 2012. With the apex bank's projection coming true in May itself, another round of hikes in key policy rates as part of its mid-quarterly review on June 16 is being seen as almost certain.

Commenting on the WPI inflation numbers for May, a concerned Finance Minister Pranab Mukherjee said: “We would keep a close watch on [the] developments, both domestic as well as international, in the coming months and make appropriate adjustments as we go along.”

Even as one segment of the ‘appropriate adjustments' is feared to be the rate increase in repo (short-term lending) and the automatic hike in reverse repo (short-term borrowing) by the same margin, Mr. Mukherjee sought to draw some comfort from the fact that, except core inflation, food and primary inflation has declined and the latest numbers are lower than the 10.48 per cent recorded in May, 2010.

“... the picture [inflation data] for the latest month is however mixed ... Other than fruits, inflation is moderating in all food items… core inflation [other than food, fuel and power] continues to harden... this poses some concerns which will have to be addressed,” Mr. Mukherjee said.

However, any action by the RBI — even by way of a 25 basis point hike in the repo rate — is likely to ruffle the industry associations as its hawkish monetary stance to tame inflation seems to have already impacted industrial growth which slumped to 6.3 per cent (under the new series with 2004-05 as base) in April this year from 13.1 per cent during the same month of 2010.

Prime Minister's Economic Advisory Council (PMEAC) Chairman C. Rangarajan feels that the apex bank's priority should be to rein in inflation. “I think the inflation numbers are in a sense upsetting ... We need to address the issue of inflation even more strongly. We need to use more monetary and fiscal policy to contain inflation…I think the RBI will probably look at the inflation issue more seriously and will take some action... [it] will probably decide to do in the context of the high level of inflation,” he said.

Though disturbing, the inflationary surge in May was not a surprise. For one, the increase of over Rs.5 a litre in petrol prices during the middle of May has had a discernible impact and is reflected in the data with its prices going up by 27.31 per cent on a yearly basis.

Apart from this, other manufactured goods such as cotton textiles and certain food items like fruits, milk, eggs, meat and fish turned costlier during the month.

Meanwhile, headline inflation for March has been revised up to 9.68 per cent from the provisional estimate of 9.04 per cent.

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