The inflation rate, measured by the Wholesale Price Index, was expected at 7 per cent, according to an NDTV poll of 15 economists. The economists said poor rainfall in July may have pushed up food prices.
Inflation of primary articles was at 10.08 per cent, while manufactured products’ inflation rose to 6.14 per cent. Fuel group inflation came in at 8.32 per cent with food articles inflation at 9.1 per cent.
The government revised June inflation figures to 7.58 per cent from 7.25 per cent.
"Inflation is a consequence of macroeconomic imbalance," Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, said. He reiterated the need for tough decisions on the economic front to accelerate growth. “The move to hike diesel prices is one such touch decision that was needed,” he added.
“We expected the core (sector inflation) to pick up. Therefore, our estimates are playing in the right fashion. The headline number is a big surprise on the higher side. We expected it to be 7 per cent. What is really worrying is that the QE3 will be negative for India in terms of commodities—oil. The commodity index has been actually rising in anticipation for a QE3,” said Indranil Pan, the chief economist at Kotak Mahindra Bank.
The rise in inflation may dim hopes of a rate cut on Monday, when the Reserve Bank of India meets to take stock of monetary policy. The central bank is likely to hold policy rates for a fifth straight month, despite India's slowing economic growth.
The impact of the diesel price hike on inflation will be 58 basis points, economic affairs secretary Arvind Mayaram said. He added that this will have a lag impact on fiscal deficit, and savings from the hike will be realized only later.
“It is a big surprise. There was some shock expected on fuel. But manufacturing has gone up, that is a bit of shock as the price rise is continuing. There has been a rise in almost all segments. But the very fact that prices continue to rise month after month shows that there is an inherent inflation pressure on the economy. With the price hikes announced today, the headline will definitely go up next month,” said A. Prasanna, senior vice-president at ICICI Securities, said.
Inflation has averaged a little over 7 per cent this year and although it remains above the RBI's perceived comfort level of 5 per cent, it is lower than the 9.52 per cent average through 2010 and 2011.
Rahul Bajoria, regional economist at Barclays Capital, said: “In manufacturing, the bulk of increase came from food products, which is not a big surprise, considering food prices have been rising fast. I am not saying the inflation numbers are something to be cheerful about. They need to be put in a context and they are not very, very bad."
The central bank has placed the onus on the government to pull the economy out of the rut and remove supply-side bottlenecks to ease inflation.
Yesterday, the government raised diesel prices by Rs 5 per litre, excluding value added taxes. Although petrol, kerosene and LPG prices were left unchanged, the government capped the number of subsidized LPG cylinders to six per household. It also cut the excise duty on petrol by Rs 5.30 per litre in an effort to give some relief to oil marketing companies reeling under subsidy losses.
The price hike drew criticism from political parties and the common man on concerns that the move could raise inflation.
However Kirit Parikh, member of Planning Commission, said the move is not inflationary.
“Let me try to explain in simple terms—if you don’t increase prices of fuel, you will have large under-recoveries. The fiscal deficit goes up, increasing the money supply. That will increase inflation. When that happens, you see the RBI will keep interest rates high, and if the interest rates are high, the economy’s growth rate goes down. Some analyses indicate that our growth rate will be around 6-7 per cent if we do nothing over the next three years, but if you bite the bullet and raise prices, the rate could be as high as 9 per cent, he added.”
RBI governor D. Subbarao has said earlier that inflation remains too high and needs to fall further or risk more damage to the economy, dismissing criticism of the bank's hawkish policy stance.
K.C. Chakraborty, a deputy governor at RBI, said the central bank's main focus remains on inflation.
Since cutting its main interest rate in April by more-than-expected 50 basis points to 8 per cent, the central bank has stayed on hold, drawing complaints that high rates are burdening consumers and slowing growth.
Dr C. Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, has said the acceptable rate of inflation is 4-5 per cent.
With inputs from Reuters