New Delhi, March 28: Inflation soared to a 14-month high of 6.68 per cent on Friday and threatened to scupper growth and suck out the heady, feel-good sentiment generated by Budget 2008 which had promised to put more money in taxpayers’ wallets.

Data on Friday showed annual inflation at 6.68 per cent in the 12 months to March 15, higher than the previous week’s 5.92 per cent and well above the RBI’s comfort ceiling of 5 per cent. It was the highest since a reading of 6.69 per cent on January 27, 2007, and the fourth consecutive week above 5 per cent.

Policymakers today signalled their concern about price pressures and the finance minister said India could give up a bit of growth to bring it down.

Bond yields hit a high

Government bond yields hit a three-month high of 7.89 per cent after Friday's price data, up from Thursday's close of 7.78 per cent, and traders said the risk the central bank would have to act was growing.

Rupee climbs

The partially convertible rupee initially showed little response to the data but then began to climb, breaking through 40.00 per dollar for the first time in a month and gaining to 39.85. It closed at 40.10 on Thursday.

Costlier food items

Wholesale inflation has shown a rising trend since early December 2007, driven largely by higher food prices, posing a major policy headache against the backdrop of slowing growth in the broader economy and general elections due by May 2009.

A modest rise in retail fuel prices in mid-February has also contributed to higher inflation, but the latest data caught many off guard.

Rising demand for food from a growing population with more spending power contrasted with stagnating yields in India’s farms has seen the prices of staple grains like wheat and rice rising by as much as 40 per cent in a year.

Attempts to douse local prices by importing grains from abroad did not succeed as global prices of maize, rice and wheat have also shot up to levels beyond India's local prices.

Commodity rates

With the growth in infrastructure, prices of iron and coal have also zoomed.

Prices of manufactured goods have also accelerated to a one-year high of 6.27 per cent in the week ended March 15 from 4.21 per cent at the start of the month.

Supply glitch

Inflation is being stoked by supply constraints and in the short term it would be tough for the government to step up supplies to check prices.

M. Govinda Rao, member of the Economic Advisory Council to the Prime Minister, said, “It would take some time for inflation to come down. It could be contained only by better supply side management.”

With the government expected to reward its 3.3 million employees with over Rs 12,500 crore in extra pay and another Rs 18,060 crore as arrears, prices may soar further as there will be more money chasing few goods in the marketplace.

Rate cut hopes dim

D. Joshi, chief economist of Crisil, said: “We don’t expect the RBI to reduce interest rates at this juncture.”

“The finance minister's statements today make it clear that price stability will now be the first priority of the government,” he said.