Mid-quarter monetary policy review going to happen on June 16. These inflation figures may force Reserve Bank of India to raise short-term interest rates to tame inflation. Economists expect 25 basis increase in key rates. If that happens, it will be 10th consecutive hikes since March 2010. The act may hinder the economic growth.
Currently, the benchmark repurchase or repo rate, at which the RBI lends to commercial banks, is 7.25 percent while the reverse repo, which the RBI pays to banks for deposits, is 6.25 percent.
Higher manufactured goods prices is one of the major factors fuelling inflation, according to the government data -- the barometer that indicates price behaviour -- shot up 7.27 per cent, while the primary articles index rose sharply by 11.3 per cent.
The index of food articles increased by 8.37 per cent in May.
RBI governor Duvvuri Subbarao believes that the current inflation rate is too high. 'We are prepared to act to tame inflation at the cost of short-term growth.' Subbarao said.
Asian economies from South Korea, Indonesia and Taiwan to China are all battling inflationary pressures.
A recent World Bank report warned that India's economic growth could moderate to eight percent in the current financial year to the end of March 2012, due to rising inflation and slowing demand.
Bond yields climbed on the news. The benchmark 7.80 percent 2021 bond yield immediately rose 3 basis points to 8.33 percent after higher than expected inflation data.