Inflation biggest worry: FM

Finance Minister P Chidambaram today asked commercial banks to join in the efforts to pull down rising inflation by "re-balancing" their loan portfolios, even as the wholesale price index-based inflation rose to 5.41 per cent in the week ending October 21.

This essentially means the finance minister wants banks to rein in runaway credit growth.

Early this week, Reserve Bank of India Governor YV Reddy, too, asked banks to rebalance their loan growth when he unveiled the mid-year review of the monetary policy, in which the repo rate was hiked to 7.25 per cent. The RBI infuses liquidity into the system through its repo window.

Inflation surged to a four-month high of 5.41 per cent for the week ended October 21 from 5.26 per cent in the previous week, mainly due to higher food prices. Inflation had touched a one-year high of 5.5 per cent in the week ended June 17, 2006. The wholesale price index-based inflation stood at 4.49 per cent during the corresponding week last year.

The latest rise in the inflation rate is mainly on account of a 0.2 per cent rise in the index of primary articles, which has a 22.02 per cent weight in the overall index.

Within the primary articles index, the food index was up by 0.5 per cent while the non-food index declined by 0.1 per cent. The index for manufactured products, which has the highest weight of 63.75 per cent in the wholesale price index, rose by 0.1 per cent, while the index for fuel, power, light and lubricants (weight 14.23 per cent) remained unchanged.

Chidambaram said controlling inflation expectations was the government's immediate goal and it would use all fiscal measures to rein in inflation towards 4 per cent.

This sparked off speculation in the market that the RBI might be forced to raise its reverse repo rate in January when the quarterly review of the monetary policy is due.

The central bank sucks out liquidity from the system at the reverse repo rate, which was left unchanged at its mid-year review at 6 per cent.

"Unless the prices of primary articles come down, the inflation rate is bound to go up and the RBI may hike its reverse repo rate in January," said Nitin Jain, head of fixed income securities at I-Sec, a primary dealer.

Reddy, however, said there was no need to review the monetary policy after the latest inflation data.

"There is no need to revisit monetary stance on inflation," Reddy told reporters in Delhi. Inflation, as measured by the wholesale price index, has inched closer to the recent peak of 5.5 per cent hit on June 17, 2006.

"Our immediate goal is to ensure that the inflation rate moderates towards 4 per cent," Chidambaram said at the inaugural session of the two-day Bankers Conference (Bancon) 2006.