Overall inflation rose to 7.55 per cent in August on accountof rising prices of food items and manufactured goods and may further escalatenext month as a result of the recent diesel price hike.
The high inflationary expectations may prevent the ReserveBank of India from cutting interest rates in its mid-quarterly review of themonetary policy scheduled on Monday despite India Inc's demand for rate cut toboost growth.
Inflation, as measured by the Wholesale Price Index (WPI),was 6.87 per cent in July. In August 2011, however, it was 9.78 per cent.
Overall, food inflation declined to 9.14 per cent in August,from 10.06 per cent in July. Food articles have 14.3 per cent share in the WPIbasket.
Manufacturing or core inflation rose to 6.14 per cent inAugust from 5.58 per cent in July, on the back of high prices of cottontextiles, paper and paper products, cement and lime.
Analysts said the diesel price hike will put pressure oninflation as input costs will rise and restrain RBI from cutting interestrates.
The Indian Government on Thursday hiked diesel price by Rs5.63 per litre and capped supply of subsidised LPG to 6 cylinders per householdin a year.
"The combined direct and indirect impacts (of dieselprice hike) will total about 100 basis points. We expect headline WPI inflationto rise above 8 per cent by end-2012, and hence do not see any scope for theRBI to cut rates until the end of 2012," research firm Nomura said in anote.
In the food articles category, pulses turned expensive by34.39 per cent in August, wheat by 12.85 per cent and cereals by 10.71 per centon an annual basis.
Inflation for June was revised upwards to 7.58 per cent,from the provisional estimates of 7.25 per cent. .
India Inc had demanded that RBI cut key rates after theApril-August industrial output contracted by 0.1 per cent.
"The pickup in core inflation confirms our expectationthat the RBI will maintain the policy rate and the CRR in the policy review.
"The first and second round impact of the diesel pricehike is expected to push WPI inflation above 8 per cent," ICRA SeniorEconomist Aditi Nayar said.
Industry chambers, however, continue their demand for makingfunds available cheaply. "The RBI should appreciate the intent of theGovernment in putting its fiscal house in order and perhaps complement itsefforts in stimulating investment and consequently employment by making privateborrowings from the banking system cheaper," Ficci said.
Meanwhile, Planning Commission Deputy Chairman Montek SinghAhluwalia said that the diesel price hike would help bring down fiscal deficitby restructuring subsidies.
The government is targeting to bring down its fiscal deficitto 5.1 per cent of GDP in the current fiscal, from 5.8 per cent in 2011-12.
As per the official data, potatoes turned costlier by 68.86per cent and rice by 10.29 per cent.
Inflation in eggs, meat, fish prices was 13.77 per cent,while in milk and fruits it was was 6.68 per cent and 1.14 per centrespectively.
Vegetables became costlier by 9.98 per cent in August,year-on-year. Inflation in this segment was 24.11 per cent in July. However,the pressure on prices of onions declined during August to (-) 20.67 per cent.
In non-food articles, inflation in oil seeds was 28.33 percent, fibres (3.53 per cent) and minerals (9.74 per cent).