New Delhi: Inflation surged over nine percent mark in May due to rising prices of fruits, milk, petrol and manufactured goods. This has raised expectations of another hike in key policy rates by the Reserve Bank later this week.

Inflation rose to 9.06 percent in May from 8.66 percent in April, prompting Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan to describe the trend as "upsetting" and pitch for tightening of the monetary policy by the RBI to cool rising prices.

The Apex Bank, which has raised key interest rates nine times since March, 2010, to check rising prices, is slated to conduct a mid-quarterly review of the monetary policy on Thursday. The RBI would try to balance the need to tame inflation and encourage industrial growth, which has slipped to 6.3 percent in April from 13.1 percent a year ago.

"I think the inflation numbers are in a sense upsetting... We need to address the issue of inflation even more strongly. We need to use more monetary and fiscal policy to contain inflation," C Rangarajan told reporters here.

According to Wholesale Price Index (WPI) data released by the government on Tuesday, several essential items, including rice, fruits, petrol, edible oils, cotton textiles and iron and steel products, became more expensive during May in comparison to April.
Inflation, according to Planning Commission Deputy Chairman Montek Singh Ahluwalia, "is a problem (but) we still remain hopeful... It has gone up, which is not unexpected, because the preliminary indications said it would go up."  Meanwhile, overall inflation for March has been revised upward to 9.68 percent from the provisional 9.04 percent.

"We are concerned about the situation... This level of inflation is causing a lot of problems," Department of Economic Affairs Secretary R Gopalan said.

In May, prices of manufactured products, which have a weight of around 65 percent in the Wholesale Price Index (WPI) basket, went up by 7.27 percent year-on-year in May.

Manufacturing inflation has been steadily rising since February this year, when it crossed the 6 percent mark. It stood at 6.18 percent in April.

Cotton textiles were up 28.99 percent and iron by 14.54 percent. Man-made textiles also became costlier by almost 11 percent.
Inflation in the fuel and power segment, which has a weight of almost 15 percent in the WPI basket, stood at 12.32 percent year-on-year.

The rate hike of over Rs 5 in petrol prices by state-owned old marketing companies in mid-May had a visible impact, with prices of the item going up by 27.31 percent on an annual basis.

During the month under review, key articles went up by 11.30 percent on an annual basis. They have a share of around 20 percent in the overall WPI basket.

Within the primary articles segment, food articles became 8.37 percent more expensive, while prices of non-food primary articles went up by 22.35 percent.

Fruits were up by almost 32 per cent, while milk and eggs, meat and fish became over 6 per cent more expensive.

Experts believe the June 16 RBI mid-quarterly review will see key policy rates going up by 25 basis points.

"The growth and inflation trade off is increasingly getting challenging. The stance from RBI based on their expectation on growth and inflation may still lean toward controlling inflation and a 25 basis points hike is expected in the upcoming policy," Kotak Mahindra Old Mutual Life Insurance Chief Investment Officer Sudhakar Shanbhag said.

Commenting on the rate hike, PMEAC chief Rangarajan said: "... I think the RBI will probably look at the inflation issue more seriously and will take some action... (it) will probably decide to do in the context of the high level of inflation."

He, however, refused to cite any numbers on the quantum of the hike in short-term lending (repo) and borrowing (reverse repo) rates.

"I do not know what the RBI will do, but I think the concern regarding inflation will be very dominant," he said.

However, the latest inflation numbers are in line with the RBI's projection for the first half of the fiscal.

In its monetary policy for 2011-12 released last month, the central bank had said that continued high prices of global commodities, particularly of oil, will continue to drive the rate of price rise.

It projected inflation to average 9 percent for the first six months of 2011-12 before moderating to around 6 per cent by the year-end.

Both the RBI and other experts had also said that inflationary pressure during the next few months would be more from commodity prices, rather than on account of food items, as was the case in 2010.

However, food inflation also inched up to above 9 percent in the last week of May after a two-month-long period of moderation.
"With rising core inflation, the focus will remain on inflation rather than on moderating growth. Therefore, we expect the RBI to hike policy rates by 25 basis points on June 16 and another 25 basis points in the third quarter," Nomura economist Sonal Varma said.

She said the rise in core (non-food) inflation to above 8 percent will be interpreted by the RBI as a sign of rising pricing power and cement the case for a rate hike.

The latest numbers come as a setback to the government after a slew of bad news, including five-quarter low GDP growth of 7.8 per cent in January-March and a slowdown in factory output growth to 6.3 percent in April.

"Going forward, we believe the upside risks to inflation outweigh the downside risks in the near-term. The upside risks include the long due fuel price hike, a possible hike in electricity prices and still elevated commodity prices," Varma said.