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Inflation sets stage for RBI action

New Delhi, April 15: Inflation in March moved tantalisingly close to the double-digit level at 9.9 per cent, strengthening the case of the RBI to raise its policy rates next week that will suck out liquidity and check prices.

The growth in the wholesale price index (inflation) in March is the highest in 17 months. It had touched 9.89 per cent in February and 8.56 per cent in January, all the time higher than the RBI’s forecast of 8.5 per cent by the end of 2009-10. The central bank will announce its credit policy next Tuesday.

Finance Minister Pranab Mukherjee today said that inflationary pressures would remain till June and prices would start cooling down only after the harvesting of the rabi crop (winter) was complete. “Of course the apprehension was that it may reach the double digit figure. So it has been moderated to some extent but you will have to see that till the month of June, this pressure will continue.”

Economists said the RBI would step in to raise its policy rates as inflation was as good as 10 per cent. “The difference is academic. What is the difference between 9.9 per cent and 10 per cent? This is a preliminary figure, the revised figures may just show 10 per cent,” Crisil principal economist D.K. Joshi said.

Member of the Economic Advisory Council to the Prime Minister Suman K. Bery said, “It is important for them (RBI) to signal concerns for inflation. I do expect some tightening in Tuesday’s monetary policy.”

Sonal Varma, an economist with Nomura, said we expected “125 basis points increase (by the RBI) of repo, reverse repo and cash reserve ratio in fiscal 2010-11, with 50 basis points hikes in each of the policy rates by June 2010”. Repo is the rate at which banks borrow from the RBI, while reverse repo is the rate at which they lend to the RBI. Cash reserve ratio is the proportion of deposits that banks must keep with the central bank.

Inflation remained largely concentrated on food items, particularly pulses and sugarcane. For the week ended April 3, however, food inflation inched down to 17.22 per cent from 17.70 per cent in the previous week.

For March, food inflation stood at 16.65 per cent with the prices of pulses rising 31.40 per cent year-on-year, milk, 17.64 per cent, and petrol, 16.82 per cent.

Prices of certain manufactured items also increased during the month.

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