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Thursday, May 21, 2009

Inflation at 0.61%

Adding stress on real interest rate

The official Wholesale Price Index for all commodities for the week ended 9 May 2009 rose by 0.2 % to 232.0 from 231.6 for the previous week. The annual rate of inflation, calculated on point-to-point basis, stood at 0.61 % for the week ended 9 May 2009 as compared to 0.48 % for the previous week and 8.57 % during the corresponding week of the previous year.

The primary articles group rose by 0.5 % to 256.0 from 254.7 on a rise in food and non-food articles. The index for food articles group rose by 0.6 % to 251.5 from 250.0 for the previous week due to higher prices of tea (11%), ragi (4%), bajra (3%), jowar and condiments and spices (2% each) and fruits and vegetables, moong, rice, wheat, masur and arhar (1% each). In addition to this index of non food articles as well rose by 0.4 % to 234.3 from 233.3 for the previous week due to higher prices of raw cotton and raw silk (2% each) and rape & mustard seed, gingelly seed and castor seed (1% each).

The index of manufactured group rose by 0.1 % to 203.3 from 203.0 for the previous week. Among this group the index of food products, textiles group, chemicals and chemical products, basic metals alloys and metal products registered an increased in this week compared with the week ago. The index for food products group rose by 0.4 % to 231.4 from 230.5 for the previous week due to higher prices of rice bran oil (4%), oil cakes (2%) and gur, imported edible oil, bran (all kinds) and gingelly oil (1% each). The index for chemicals and chemical products group rose by 0.05% to 217.7 from 217.6 for the previous week due to higher prices of carbon black (3%). On a flip side index for paper and paper products group declined by 0.2 % to 203.5 from 204.0 for the previous week due to lower prices of newsprint (2%) and other boards (all kinds) (1%).

The index for fuel, power, light and lubricants group remained unchanged at its previous week's level of 323.7.

Milton Friedman once wrote, "Whatever its proximate source, inflation is a disease, a dangerous and sometimes fatal disease, a disease that, if not checked in time, can destroy a society." Inflation, as everyone knows, is contained or controlled through monetary policy.

However recent inflation numbers are within the comfortable zone of the apex bank of India but pressure on real interest rate is remain on elevated side. Usually inflation and interest rate have positive relation. Sharp fall in wholesale price index and comparatively lower reduction in prime lending rate from commercial banks resulted in higher real interest rate. At the same time higher fiscal deficit numbers are adding stress on lone term interest rates. To funding the fiscal deficit government is borrowing from the market which ultimately adding stress on interest rate. The major task on front of new government is to reduce the pressure on real interest rate while funding fiscal deficit.

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