Sunday, 9 March, 2008

Inflation rises to 5.02%

Reserve Bank of India (RBI) Governor YV Reddy's decision to keep interest rates unchanged has once again been vindicated, with inflation rising to a 10-month high. Rising global prices of food and oil have pushed inflation levels back above the 5 per cent mark for the first time since May of last year. Inflation for the week ended February 23 came in at 5.02 per cent compared to 4.89 per cent, the week before. A bulk of the increase came from the primary articles index, which rose to 6.28 per cent versus 4.89 per cent in the previous week. The food index rose 4.8 per cent versus 2.98 per cent the week before.

The unexpected rise in inflation levels above 5 per cent comes due to soaring global food prices. This factor is likely to continue putting pressure on prices over the next weeks. Analysts now expect inflation levels to remain above 5 per cent over the next few months. The rise in inflation came at a time when signs of slowing GDP growth are also intensifying. The government estimates that GDP growth will slip below 9 per cent in the current financial year. Slowing growth in industrial production and weakness in consumer driven sectors drive it. This weakness has led to calls from policy makers and industrialists to lower interest rates to help support the economy's growth momentum. But with inflation now back up above the RBI's target of 5 per cent, it seems increasingly unlikely that the RBI would be willing to cut rates anytime soon. Currently, there are acute policy dilemmas arising from global food and energy prices that need to be factored-in in evolving appropriate policy responses, said YV REDDY, Governor, RBI.Even the government accepts that inflation will remain above 5% in the short term. This indicates that high interest rates will continue to be a reality for months to come.