Putting the Reserve Bank of India in a dilemma and adding to the worries of the government caught between a dampening growth rate and spiralling prices, headline inflation has soared to 9.78 per cent in August as against 9.22 per cent during the last month. The RBI which is scheduled to announce its mid-quarter monetary policy review on September 16, is caught in a bind as to whether it should raise interest rates further — that has hurt the growth rate — or adopt a wait-and-watch policy for tackling inflation. In the last 18 months, the RBI has raised rates 11 times. Analysts who were expecting a pause in rate hikes after the index for industrial production (IIP) dipped to 3.3 per cent in July from 9.9 per cent previously are now talking about a 25 basis points hike in the repo rate on Friday. With rising prices of food, fuel and manufactured items fuelling the headline inflation, the wholesale price index (WPI) for the month of August is at a 13-month high since July 2010, when it stood at 9.97 per cent. A worried government said that the headline inflation is “perilously close to double digit”. “The RBI is also watching the situation like the government, and collectively it would be possible for us to tackle the problem,” Finance Minister Pranab Mukherjee said. While Chief Economic Advisor in the finance ministry Kaushik Basu cautioned that “there is no black and white answer... and the RBI will have to balance between controlling inflation and dampening growth.”
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