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No relief in sight

Inflation threatens to spiral upwards, according to a report.

India’s soaring inflation rate may not ease in the next few months. As per a recent report released by Barclays Capital, a global investment bank, inflation could hit 17 per cent by September 2008.

Fuelled by skyrocketing food and energy prices, the report says that the Reserve Bank of India will need to tighten monetary policy significantly in the coming months to contain inflation.

According to the report, over the next two quarters, the manufacturing sector inflation will add 200-300 basis points to the inflation rate, whereas food and oilseed inflation will add 100-200 basis points. “We expect manufacturing sector inflation to continue to accelerate due to demand-side pressures and supply side related factors. On the supply side, prices of base metals, electricity, cement, textiles, leather products, rubber & plastics, wood & paper products, and fertiliser & pesticides are likely to rise significantly since these items have held steady or picked up only marginally relative to the cost increases seen in these sectors over the last six months,” the report says, adding that the government is likely to hike fuel prices by around 10-20 per cent again as early as September 2008 since the government’s ability to finance the large fuel subsidy is limited.

Furthermore, RBI is expected to further tighten the monetary policy by hiking the short-term lending rate (repo rate) and mandatory cash requirements for banks to tame inflation, indicates the report. Barclays revised average WPI inflation forecast for the current year to 14 per cent from an earlier estimate of 13 per cent.

The inflation rate, for the week ended July 5, 2008, increased further touching a 13-year high of 11.91 per cent, up from 11.63 per cent last fortnight. This is way higher than the Reserve Bank’s tolerance level of 5 per cent. All this spells tough times for the Indian consumer.

Manu Kaushik