Inflation in India rises to 6.73%

Defying all the monetary and fiscal measures taken by the government and the central bank in the past few months, inflation continues its upward march. The annual inflation measure based on wholesale price index has returned a reading of 6.73 per cent for the week ended February 3, up from the previous week's 6.58 per cent and highest in about 2 years. What's worse is the inflation estimate for the week ended Dec. 9 has been revised to 5.63 percent from 5.32 percent. It's a usual practice to revise the inflation data with a lag of two months on additional price data.

The rise in inflation figures is being driven by the rapid economic growth and credit expansion, together with supply constraints in agricultural commodities and food articles. While the RBI has been pursuing a gradual tightening to avoid liquidity overhang, the central government has taken measures like ban on export of certain items, easing import restrictions, cuts on customs duties, restriction on futures trading of some essential commodities and cut in petrol and diesel prices. With the combined effect of these measures, inflation numbers should moderate over next couple of months. However, as the economy has taken off into an unchartered territory of high growth, it is expected that the central bank will continue to raise rates and do everything at its disposal to actively manage the liquidity.

Bond markets have been in a virtual free fall in this scenario of rising inflation and monetary tightening (and 'to be continued' signs). The benchmark 10 year yield is above 8 per cent.