After petrol price hike, brace for higher interest on loans

After a steep hike in petrol prices, the stage appears set for interest to go up on automobile, housing and corporate loans with the Reserve Bank of India (RBI) widely expected to hike key rates at noon Friday to tame inflation

RBI Governor D. Subbarao will conduct a mid-quarter review of the monetary policy for this fiscal against the backdrop of annual inflation rate once again nudging double-digit levels, even as industrial output has slackened.

If the rates are hiked, it will be the 12th such exercise since January last year, even as analysts have begun to doubt if the aggressive stance of the central bank is having any effect at all on curbing price rise.

People at large are already fuming after state-run oil retailers announced a hike of Rs.3.14 per litre in petrol prices, the 10th time since the government decided to free this essential fuel from price controls in June last year.

"Headline inflation has accelerated to a high of 9.78 percent on the backdrop of weak industrial output figures. This raises the question whether the RBI's monetary policy is having an effect at all," said Anis Chakravarty, director, Deloitte Haskins & Sells.

"Statistics reveal that inflation since Jan 11 has consistently remained over 9 percent despite persistent rate hikes by the RBI. We hope the RBI pauses in the current cycle and reflects on alternate means to address this issue."

Latest data showed annual inflation rate for August, based on the wholesale price index, inching closer towards double digits at 9.78 percent, while food inflation still remained at elevated levels.

For the week ending Sep 3, food inflation was registered at 9.47 percent.

At the same time, India's gross domestic product growth declined to 7.7 percent in the April-June period, the slowest in six quarters, and industrial output slumped to 3.3 percent in July, the slowest in 21 months.

As headline inflation surged closer to double-digit, the chief economist with the finance ministry, Kaushik Basu, said the Reserve Bank would have to control inflation without affecting growth too much.

"There is no black and white answer. RBI will have to balance out these two -- controlling inflation and not dampening growth too much," Basu said, expecting inflation to remain at elevated levels till the end of this year. 

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