BAD NEWS! Inflation may go up; rate hike likely

Costlier diesel and liquefied petroleum gas will weigh on inflation, which may further go up to 9.2- 9.7 per cent in June, exerting pressure on the Reserve Bank of India to go in for another round of interest rate hike.

The inflation numbers for June will be released on Thursday.

Economists said the full cascading impact of the sharp raise in diesel, LPG and kerosene prices announced on May 24, would be visible from July onwards when inflation could touch the double digit mark.

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Despite slowdown in the factory output and industry making hue and cry over rising interest rates, the economists said the RBI is left with very little choice than to go in for yet another round of interest rate hike.

The RBI is scheduled to undertake quarterly review of credit policy on July 26, when it may undertake a rate hike of 25-basis points. Its benchmark rate has already gone up by 250 basis points (2.5 percentage points) since March 2010.

"The hike in fuel prices, especially diesel, has increased supply side constraints.

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"The impact will be felt on the headline inflation and we expect it to be between 9 to 9.5 per cent in June," Deloitte, Haskins and Sells director Anis Chakravarty said.

He said overall inflation is likely to remain elevated for some time and could breach the double-digit mark in July.

"There is a fear that inflation may touch 10 per cent in July. However, we expect the pressure to moderate by the third quarter," Chakravarty said.

Asked about RBI's likely course of action, he said: "It is true that rate hikes have affected investment and slowed down industrial growth. However, RBI's primary focus has been and will remain inflation control and so another hike in rates of 25 basis points is likely on July 26".

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Headline inflation stood at 9.06 per cent in May. It has been above 8 per cent since January 2010.

RBI has hiked its key policy rates 10 times since March last year to curb demand and tame inflation.

However, increase in rates has led to a fall in investments and the industry has blamed this for slowdown in factory output.

Industrial growth fell to a nine-month low of 5.6 per cent in May, mainly on account of poor performance by the manufacturing sector, which has been hit by falling investments.

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"We expect June inflation at 9.2 per cent. The rise will be mainly on account of the fuel price hike and the segment most affected will be manufactured items," Crisil chief economist D K Joshi said.

While expensive food items was the main contributor to inflationary pressure in 2010, inflation in manufactured items has started to rise during recent months and stood at above 7 per cent in May.

Joshi forecast the July inflation numbers, which will be released next month, to be above the June level.

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"Headline inflation can touch double-digit in July," he said.

Joshi added that RBI's monetary tightening will continue as inflation remains high.

"We expect an increase of 25 basis points in rates on July 26," he said.

The apex bank had said that inflationary pressure is likely to continue in the next few months on account of high global commodity prices, particularly crude.

"Our projection is that June inflation would be around 9.7 per cent mainly on account of the fuel price hike and it is possible that in July the numbers will touch double-digit," Standard Chartered India head of research Samiran Chakraborti said.