Led by rising prices of vegetables and petrol, inflation moved up to 7.55 percent in May making it tougher for the Reserve Bank to cut interest rates in its policy next week to boost sagging growth.
Finance Minister Pranab Mukherjee expects inflation to be in the range of 6.5-7.5 percent during the current fiscal on back of good monsoon.
Experts said that the rise in inflation, which is mainly on account of food inflation, may not dissuade the RBI to go in for at least a 0.25 percentage points cut in short-term interest rate in its monetary policy review on June 18.
Inflation, as measured by the Wholesale Price Index (WPI), was 7.23 percent in April. In May last year, however, it was 9.56 percent.
“I am confident that range of inflation would be around 6.5-7.5 percent throughout the year. I hope if monsoon is quite good, then it would be possible that this type of pressures would be sorted out,” Mukherjee said.
Overall food inflation rose to 10.74 percent in May, from 10.49 percent in the previous month. Food articles have 14.3 percent share in the WPI basket.
The headline inflation number for March was revised upwards to 7.69 percent, from the provisional estimate of 6.89 percent.
During May, manufactured inflation showed some easing and was at 5.02 percent. It was 5.12 percent in April. In the ‘fuel and power’ segment inflation rose by 11.53 percent on an annual basis. The rate of price rise was 11.03 percent in the previous month.
“Notwithstanding the elevated inflationary expectations, concerns related to the moderation in economic growth may prompt the RBI to reduce the Repo Rate by 25 basis points in its policy,” ICRA Economist Aditi Nayar said.
Mukherjee further said that to contain the price rise it would “have to address supply constraints, (and issues concerning) cold chaining and warehousing facilities”.
As per the official data released today, potatoes turned costlier by 68.10 percent in May on an annual basis. For April, the rate of price rise was 53.44 percent. Besides, pulses and wheat turned expensive by 16.61 percent and 6.81 percent, respectively.
Besides, vegetables inflation was at 49.43 percent in May. In April, the rate of price rise was 61 percent.
Also, eggs, meat and fish prices rose 17.89 percent during the month, slightly higher than 17.54 percent in April. Inflation in milk was 11.90 percent, while rice and cereals turned costlier by 5.07 percent and 5.73 percent, respectively.
Onion prices declined (-) 7.23 percent in May. The rate of decline was (-) 12.11 percent in April.
“There is pressure on food articles. RBI might try to protect growth. But they do not have much leeway for that,” Crisil Chief Economist DK Joshi said.
To contain the inflationary pressure, government is now pinning hopes on monsoon. Rains are crucial for agriculture as only 40 percent of cultivable area is under irrigation.
The farm sector contributes about 15 percent to the GDP, but it employs about 60 percent of population.
In the ‘fuel and power segment’, inflation in petrol and diesel stood at 10.51 percent and 9.24 percent respectively.
The latest inflation numbers takes into account the petrol price hike of over Rs 7.50 a litre effective from May 23. However, later in June, it was rolled back by Rs 2 a litre.
The BSE Sensex fell over 200 points to 16,672 on disappointing inflation numbers, besides other factors.
As per data, inflation in non-food primary articles, which include fibres and oilseeds, increased sharply by 8.47 percent in May. In April it was 1.61 percent.
The government is battling rising inflation and declining growth, which experts feel could lead to a ‘stagflation’ — a situation marked by persistent high inflation and low growth. Besides, a weaker domestic currency is putting pressure on policymakers.
The country’s growth has fallen to a nine-year-low of 6.5 percent in the 2011-12 fiscal, while inflation remained close to the double-digit mark for entire 2011.
“India’s economy is in stagflation, with notably weaker growth but inflation still stubbornly high… With India’s weaker growth prospects, we think that the RBI could cut rates without it putting too much upward pressure on inflation,” Moody’s Analytics said in its report.
Since January, the RBI has resorted to injecting liquidity into the financial system, by reducing Cash Reserve Ratio for banks. Besides, it has called for fiscal steps by the government to combat inflation.
In its annual monetary policy last month, RBI cut key lending rate by 50 basis points to lower borrowing costs amid falling industrial and economic growth.
RBI has projected inflation to be around 6.5 percent by March 2013, with a caution that it would remain sticky and there is a need to arrest the decline in economic growth.
–PTI