Oil fuels inflation to 11.05 per cent

Expect more monetary, fiscal measures, says FM.

Companies and consumers can expect another round of monetary tightening and administrative measures as headline inflation based on the wholesale price index crossed double digits to touch 11.05 per cent for the week ended June 7, the highest since May 6, 1995.

The inflation numbers spooked the stock markets, with the benchmark Sensitive Index dropping to its lowest in almost 10 months. The Sensex fell 516.70 points, or 3.4 per cent, to 14,571.29, its lowest since August 24. All but one stock in the index fell.

The 13-year high beat all analysts' "" and the government's "" expectations by almost 100 basis points and reflected the impact of the June 4 increase in auto and cooking fuels.

Petrol prices were raised by Rs 5 per litre, diesel by Rs 3 per litre and LPG by Rs 50 per cylinder after the basket of crude oil that Indian refineries buy touched $125 per barrel.

The inflation rate stood at 8.75 per cent in the previous week and 4.28 per cent in the corresponding week the previous year.

"Ninety-four per cent of the weekly jump is on account of fuel," Finance Minister P Chidambaram said in a brief statement outside his North Block office this afternoon.

"Inflation for the current week also captured rupee depreciation making imports dearer," said Dharmakirti Joshi, principal economist, Crisil.

"This is indeed a very difficult time," Chidambaram said, adding: "We will have to look at stronger measures on the demand side and the monetary side."

The government has already taken several fiscal and administrative measures like banning the export of some food items and cement, cutting import duties, banning futures trading in some items, and reducing customs and excise on petroleum products to curb the price rise.

Analysts and companies expect the inflation rate to stay above 10 per cent in the weeks ahead as the fuel price rise works its way through the system.

"The inflation rate will be around 11.45 per cent next week," said Saugata Bhattacharya, vice-president, economic research, Axis Bank, attributing the rise to an increase in private transport prices that will push up fruit and vegetable rates.

"Even by December the inflation rate will remain close to 10 per cent. It will decline only by January or February, but not below 9 per cent," he added.

"The wholesale price index does not look like coming down unless there is a very sharp correction in crude oil and commodity prices," Joshi added.

Meanwhile, with the inflation rate consistently above the Reserve Bank of India's comfort level of 5 to 5.5 per cent since February (see chart), bankers and economists expect the central bank to raise the cash reserve ratio (CRR), the proportion of deposits the central banks require banks to keep with it, 25 to 50 basis points.
 

WHAT STOKED INFLATION
Weight in index	Per cent increase*
Light diesel oil
0.16	21
LPG
1.83	20
Naphtha
0.41	17
Furnace oil
0.49	15
ATF
0.17	14
Petrol
0.89	11
High speed diesel
2.02	10
Bitumen
0.15	7
* week-on-week

While most public sector banks indicated they would not revise interest rates immediately, the country's second-largest private sector bank, HDFC Bank, raised its prime lending rate 25 basis points to 15.25 per cent.

Last week, the RBI raised the repo rate 25 basis points to 8 per cent, the highest in 5½ years.

The repo rate was raised for the first time in more than a year in a bid to curb demand, which is widely seen as stoking inflation.

India Inc is worried. K V Kamath, who heads ICICI Bank, India's largest private bank and is president, Confederation of Indian Industry, said inflation was reaching the "concern zone".

"This is criminal... An interest rate rise is now imminent, which is a very worrying factor for the automobile industry. The situation is getting out of control," said Ajay Seth, chief financial officer of India's largest passenger carmaker, Maruti Suzuki.

Some corporate chiefs, however, remain upbeat. Keki Mistry, vice-chairman & managing director of HDFC, India's largest home mortgage institution, said the company would take a call on raising interest rates in a couple of weeks. But he does not see much of an impact on home loans even if the rates rise 50 basis points.

"For a Rs 15-lakh loan, the best rate to a customer, assuming the interest rate was 10.25 per cent, effectively results in an actual cost of 5.1 per cent to a borrower because of the tax concessions," he said. The average loan size for HDFC is Rs 14 lakh.

Adi Godrej, chairman of Godrej group, said: "Some inflation-sensitive sectors may be impacted but the overall fundamentals are strong. With the monsoons panning out well, growth should be strong this year."

With today's numbers, India has joined the ranks of a few other Asian economies with double-digit inflation like Vietnam (25 per cent), Indonesia (10.4 per cent). China's inflation has come down to 7.7 per cent in May but is expected to rise again with an 18 per cent increase in petrol and diesel prices Thursday.

However, these countries measure inflation in terms of their retail prices whereas headline inflation in India is based on wholesale prices. Meanwhile, the Communist Party of India (CPI), one of the Left parties that support the government, demanded Chidambaram's dismissal, saying all his measures to control inflation have been a total failure.

"We want his immediate ouster," CPI General Secretary A B Bardhan told reporters in Raipur, Chhatisgarh.

President of the opposition Bharatiya Janata Party (BJP) Rajnath Singh said, "The UPA rule will down in history only as an era of 'golden failures'."

He said the BJP-led National Democratic Alliance, which was in power from 1999 to 2004, "left behind a legacy of sound macro-economic indicators and an economy of surpluses".

"Using these indicators the United Progressive Alliance government should have unleashed a new age of heightened double digit growth. Instead it has pushed the country into an era of double-digit inflation," Singh said.