The Hindu Business Line : Inflation woes could play spoilsport on B-day

New Delhi, Feb. 27 While a populist Union Budget 2008-09 is widely predicted to be on the cards, the Government’s mounting inflationary woes could well play spoilsport. There’s an outside chance that inflation could test the RBI’s upper limit of 5 per cent on Budget day, when fresh wholesale price index (WPI) number are slated to be announced by the Centre.

A combination of an unusually low base and the effect of the recent 4.5 per cent hike in petrol and diesel prices — the first since June 2006 — is widely predicted to push the year-on-year inflation rate to a new six-month high on February 29.

Galloping rate

The widely tracked WPI-based inflation rate had galloped to 4.35 per cent for the week ended February 9, for which the Government has released latest data so far, as the prices of vegetables, fruits and lentils shot up.

The data up to the week ended February 16, to be released on Friday (Budget Day), are expected to capture the rise in petroleum prices announced by the Government on February 14, when petrol and diesel prices were hiked by Rs 2 and Re 1 a litre, respectively.

The WPI ‘All Commodities’ index for the week ended February 17, 2007, which would be the base year for the calculation of the year-on-year inflation rate for the upcoming week (ended February 16, 2008), is also at its lowest in the whole of calendar year 2007 at 208.6 points. This could translate into a spurt in the inflation rate for the week ended February 16, 2008.

In its third quarter review of the annual Monetary Policy on January 29, the RBI had noted that risks to inflation from high and volatile international prices of fuel, food and metals appear intensified. The Central Bank had refrained from cutting interest rates on mainly concerns that rising oil and food prices will stoke inflation.

Excess cash check

The RBI Governor, Dr Y.V. Reddy, has raised interest rates nine times since October 2004 and ordered commercial banks to place more deposits with it five times since December 2006 to prevent excess cash in the economy from stoking inflation.

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