Ouch! India’s Inflation index at 11.42%

India’s wholesale price index (WPI), the widely watched inflation number, moved up a notch to 11.42%. This is a provisional number and it would be safe to assume that the actual figure would be closer to 12% (WPI for week ended April 19 was revised to 8.23% from 7.57%).

This has of course set people speculating on RBI being taking harsher monetary steps. But the RBI’s internal models would have perhaps taken this scenario into account already. It needs to be seen as on top of the situation and not reacting to every week’s inflation figure. That’s one. Moreover, the cash reserve ratio (CRR) hike is effective in July so money will anyway get sucked out from the system after a fortnight.

Already, state-run banks have hiked their benchmark lending rates by 50 basis points; all linked loans have become more expensive. Other banks too will follow suit, after their asset-liability committees take stock of the situation. If the RBI gives another interest rate hike signal, it may really depress sentiment and invite a backlash against the government, so it would be loathe to do that.

It would perhaps let the currency appreciate, which makes imports cheaper, this time ignoring the protests of exporters and the commerce ministry. It may look to the government for more measures. Yesterday, the government exempted goods transporters from service tax. This has been a long standing demand of the industry, which revenue officials have resisted because it’s a lucrative form of revenue. That will allow fleet operators to hold on to rates (if they want to in the first place) despite a hike in diesel prices. So, the government will have to take such measures, even if revenue collection targets get affected.

One is likely to see more such measures in the coming months, either in the form of lowering subsidies (new fertilizer pricing announcement on June 26) without affecting the end-user or imposing taxes which don’t have a cascading effect on a large portion of the population (tax on 1500cc plus cars) It points to interesting times ahead as one watches authorities tackle inflation, crude has crossed $140 /bbl which points to, maybe, further hikes in the fuel basket. That will push up inflation further.

What will happen if reported inflation crosses 12%?

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