New Delhi/Mumbai, Jan. 19: Inflation surged to a two-year high at 6.12 per cent, sparking fears that the RBI will raise the benchmark interest rate when it meets on January 31 in an attempt to slam the lid on the spectre.
The RBI has no choice now but to mount a full-fledged inflation-fighting operation and bankers expect the central bank to raise the reverse repo — the key rate signalling device — by a quarter of a percentage point.
If it happens, it will be the first rate hike of 2007 and will come on the back of three increases in 2006. The reverse repo is currently poised at 6 per cent and serves as the base on which the whole edifice of the country’s interest rates rests.
A hike in the benchmark rate would push up the cost of all borrowings, especially home and personal loans. The bigger worry for industry is that a rate hike could scupper the champagne-popping growth they have been recording over the past year.
At 6.12 per cent, inflation is way out of whack from RBI’s forecast of holding inflation in the 5-5.5 per cent range for the year.
Although inflation had been flagged as a concern at the start of this fiscal, the government and the RBI were confident that it wouldn’t spiral out of control even as the economy continued to boom. The Indian economy has been growing at the rate of 9.2 per cent during the second quarter (July-September 2006) — almost as fast as the Chinese economy.
But the boom has brought along inflation which has been triggered by higher food and fuel prices.
Finance minister P. Chidambaram, who normally plays down headline news, today admitted the spurt in inflation to its highest since the end of 2004 was a matter of concern and the government was watching the situation carefully.
“Inflation is a monetary phenomenon and is also being driven by supply-side constraints…. The ministry of finance is in touch with the RBI and agriculture ministry, and we will do whatever is needed,” Chidambaram said.
Most of his aides in North Block are now busy working on the budget. But a section of them has started to draw up contingency plans to tackle the runaway price rise. Cuts in duty of food and petroleum goods could be worked into the budget figures.
The government needs to curb inflationary pressure not merely because it could nix the India growth story but also because four crucial Assembly elections are coming up later in the year.