As inflation rises, RBI may baulk at easing interest rates

Inflation, which has been a key concern for the RBI, rose to 4.86 per cent from 4.7 per cent a month ago on rising commodity prices.

July 15, 2013 06:08 pm | Updated November 26, 2021 10:24 pm IST - Chennai

RBI Governor D. Subbarao coming out after a meeting with Finance minister, P. Chidambaram at North Block in New Delhi on Monday. Photo: Shiv Kumar Pushpakar.

RBI Governor D. Subbarao coming out after a meeting with Finance minister, P. Chidambaram at North Block in New Delhi on Monday. Photo: Shiv Kumar Pushpakar.

Snapping a four-month declining trend, headline inflation rose to 4.86 per cent in June adding to an ominous cocktail of factors that could well force the Reserve Bank of India (RBI) to hold its hand in the matter of easing interest rates in its upcoming quarterly monetary policy review on July 30. The rise in wholesale price inflation, albeit marginal, adds to last weekend’s news of an increase in consumer price inflation and the depreciation in the rupee, which has shed 5.51 per cent since the start of June, raising the possibility of a further rise in prices across the economy.

The increase in the wholesale price index (WPI) was driven mainly by rise in prices of rice, cereals and vegetables such as onions. Rice and cereal prices shot up by 19.11 per cent and 17.18 per cent, respectively, but prices of pulses and potatoes declined. Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry, promptly urged the government to address bottlenecks in supply.

The RBI took note of the higher inflation at the wholesale and consumer levels with the Governor, D. Subbarao, telling reporters in New Delhi after an hour-long meeting with Finance Minister, P. Chidambaram: “Of course, we will take into account inflation numbers while framing the policy.” There has been an increasing clamour from industry for a cut in rates to revive growth. Last week the government released industrial output data showing a fall of 1.6 per cent in May compared to a 1.9 per cent growth in April.

The normal monsoon this year could yet drive food inflation down in the next few weeks but economists say that the falling rupee is likely to drive manufacturing inflation upwards. To stabilise the rupee, the government could be thinking in terms of an issue of NRI bonds. In an exclusive interview to The Hindu in New Delhi, the Chairman of the Prime Minister’s Economic Advisory Council, Dr. C. Rangarajan said: “In the past, we have raised foreign exchange through the issue of NRI Bonds. This is an option we must explore. We must, however, choose the right time.”

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