Friday highlighted growing pressures on the economy after fresh data showed that industrial growth fell to a disappointing low in May and wholesale prices inched higher, leading the finance ministry to warn that double-digit inflation was here to stay till the end of the year.
The double whammy saw the Bombay Stock Exchange's benchmark Sensex fall 3 per cent or 456.39 to close at 13,469.85 even as global rating agency Standard and Poor's suggested it might lower India's sovereign rating of BBB- (investment-grade status) due to the country's deteriorating credit profile over the last 12 months.
Despite evidence of slower industrial growth, owing to rising interest rates and slower consumer demand, a further monetary tightening is widely anticipated to arrest inflationary expectations.
The Reserve Bank of India has raised the repo rate, or the rate at which it lends funds to banks, twice by 25 and 50 basis points to 8.5 per cent in this financial year.
The cash reserve ratio, or the proportion of deposits banks must keep with the RBI, has been raised 125 basis points to 8.75 per cent.
The Index of Industrial Production growth for May slowed to a six-year low of 3.8 per cent against 10.6 per cent in the same month last year. The April numbers were also revised to 6.2 per cent from the earlier 7 per cent estimate.
"The sharp deceleration in production growth raises concerns over manufacturing outlook for the second half of 2008," said Moody's Economy.com economist Sherman Chan.
The provisional wholesale price index-based annual inflation rate rose to 11.89 per cent for the week ended June 28, driven mainly by an increase in prices of fruit and vegetables, pulses, edible oils, textiles, fertilisers and chemical products.
"There is upward pressure on the index itself. The second round impact of the recent fuel price increase effective from June 5 is pushing prices of food items up. This is not only the base effect at work. I expect inflation to average 10 per cent this year," said Dharmakirti Joshi, principal economist, Crisil.
"Everywhere you look -- the industrial growth numbers, capital goods, electricity, mining etc -- everything is down. But when you look at inflation, everything is going up," said Joshua Felman, resident representative, International Monetary Fund.
"More than the inflation numbers, it is how widespread the price rise really is. There is no doubt the economy has slowed, but the bigger worry is inflation. Earlier it was being imported, but what we are seeing is the second round impact as companies pass on rising costs to consumers," Felman added.
Rising food prices are a politically sensitive matter for a government battling the price rise through calibrated fiscal and administrative measures ahead of general elections slated in early 2009.
Barclays Capital Research said WPI inflation could hit 17 per cent by September 2008.
Shubhashis Gangopadhyay, advisor to Finance Minister P Chidambaram, told reporters that inflation would stay in the double digits until December, adding that he expected economic growth to slow slightly in 2008-09.
"We are trying to cope with the impact of high oil prices and inflation. Steps already taken by the central bank would help tame inflation," he added.
