He added that by March 2009, inflation would fall further to around 5.5 per cent, closer to the central bank's target.
Rangarajan said there was a need to raise retail prices of fuel and added the government faced a dilemma on account of the impact the move would have on inflation. "Some adjustment of retail prices is needed as crude is mostly imported and its cost has gone up. There is a limit to which oil bonds can be given."
He said the 3 per cent growth in the Index of Industrial Production in March this year was due to the base-year effect as the growth rate was very high in the corresponding month last year.
"We still think that gross domestic product growth rate in 2008-09 can be close to 8 per cent. Correspondingly, the industrial production could be a little higher than that," Rangarajan said.
A moderate increase in retail prices of fuels is likely next week once a final decision on a proposed set of measures. Diesel prices may be spared or raised marginally keeping in mind the impact such an increase would have on inflation. Petroleum ministry officials today said a retail price hike of petroleum products seems inevitable and added that a draft proposal for the consideration of the Cabinet will be prepared by later today.
Rangarajan, who spoke to reporters on the sidelines of a conference organised by the National Institute of Public Finance and Policy, exuded confidence that industrial production growth will be higher than 8 per cent in 2008-09.
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In the event that the price of petrol goes up by Rs 2 and that of diesel by Re 1, it will directly impact the wholesale price index for the fuel group, pushing it up by 20 to 25 basis points. A 25 bps rise in the index implies that the WPI inflation rate reported today at 7.82 per cent for the week ended May 10, would have been higher at 7.96 per cent.
In addition, a fuel price hike will also push up transportation and energy costs, leading to an across the board increase in prices of commodities, impacting the index in turn ends.