New Delhi: Adding to the woes of the govt, the inflation on Friday inched towards 12 per cent mark while the industrial growth nosedived to 3.8 per cent amid fears that RBI could take more price control steps that could make the borrowing further costlier.

Reacting sharply to weak indicators of economy, the stocks markets also plunged on Friday with the benchmark Sensex taking a hit of over 450 points.
For the week ended 28 June, 2008, inflation continued to rise from its 13-year high to 11.89 to a new high of 11.89 per cent driven up by surging food and commodity prices even as finance minister P Chidambaram's adviser Shubhashis Gangopadhyay has predicted double digit inflation to continue throughout the year 2008, and potentially impacting growth negatively.

Speaking to the media after the new official figures of inflation were revealed, Gangopadhyay said that double digit inflation could well continue till December 2008, while commenting that monetary steps taken by the Reserve Bank of India (RBI) have helped contain inflation, yet there would be a negative impact on growth. I don't think this will be severe," he added.

As part of its measures to reign in inflation, the RBI has increased its short term lending rate, the Repo, by 0.75 per cent in June in two phases. It has also increased mandatory deposits to be kept by banks by 0.5 per cent in similar two phases.

Fears persist that in its quarterly review in the last week of July, RBI may revise the interest rates upward making industrial borrowings costlier which could affect economic activity.

Already the crucial segments of industry, manufacturing and electricity generation, have performed badly with rising interest rates hitting their growth, even though  mining output showed an upward trend, growing by 5.2 per cent in May against 3.8 per cent a year-ago.

Strengthening fears of tighter money supply, global investment banking major Goldman Sachs said, "Monetary policy will continue to have a tightening bias, in our view." Financial Services major Citigroup also said in its latest analysis for India that "the days of nine percent plus growth are over and we believe that India has lost the opportunity to sustain those levels for now, and we expect growth to come in around 7 per cent plus levels in fiscal 2009-10".

ICRIER director Rajiv Kumar said, "I think the downtrend will continue because of overall contraction in economy. Toplines are coming down because of higher interest rates and credit squeeze, while bottom lines are coming down because of higher wages,"

The finance ministry is already expecting economic growth to moderate to 8-8.5 percent this fiscal from nine per cent in 2008-09.

Gangopadhyay said that with respect to food prices, there has been a marginal improvement with the prices of a number of items coming down, which has provided much needed relief to the economically weaker sections of society.

Talking about the slowdown in industrial growth to 3.8 per cent in May from 10.6 per cent a year ago, Gangopadhyay said investment would most likely remain strong despite the high interest rates, even though the tighter monetary policy would make those planning to invest through debt rethink their plans. He said cash rich corporates would continue to invest in long-term projects.

Voting in favour of removal of subsidies on the price of oil, Gangopadhyay said that though the high oil prices are a concern, "oil subsidies must go." He said he favoured rationalization of oil prices, though that could be done at a later stage, but agreed that they need to be linked to the market rate as a principle.

The data indicates that inflation rose on account of rising prices of coconut oil , which have increased 11 per cent, mustard oil by five per cent, soya oil by four per cent, and fruits and vegetable, pulses, jowar and barley having increased by one per cent each.

India's wholesale price index rose 11.89 per cent in the 12 months till 28 June, according to the government data. Estimates peg the contribution of steel and steel products to inflation at around 21 per cent, while cement prices are widely expected to remain soft on account of the capacity addition. For the 20th consecutive week, the inflation rate reigned above the 5.5 per cent central bank's target for the end of the fiscal year in March 2009.

Inflation is expected to hit the 11.9 per cent mark next week, when figures computed till 4 July, 2008 are revaled. The 10 year benchmark yield has already crossed 9.5 per cent. Finance ministry officials have previously indicated that before it starts its slow descent, inflation could well touch the 13 per cent mark.