The annual inflation rate rose to a two-year high of 6.58 per cent for the week ended January 27, from 6.11 per cent in the week before, adding fuel to the already heating banking sector which has seen rates rising for a month.

Inflation remained below 6 per cent in the last two years and recently hovered in the range of 5 to 5.5 per cent — the tolerance band set by the RBI for this fiscal. But in the beginning of this year, the rate crossed 6 per cent mark, adding 142 basis point in the past eight weeks, from 5.16 per cent in the week ended December 2 to the current level.

The surge is driven mainly by a steady rise in the prices of primary goods like foodstuff. The index for other items like manufacturing in the wholesale price index (WPI) remained unchanged. The government took measures like reducing duty on cement, capital goods, steel, aluminium, copper and other industrial raw material, and even banned trading of items such as urad, but inflation, based on the WPI on January 20, touched 6.11 per cent in the week before January 27.

“It is above everybody’s expectation. It is beyond the tolerance level of the RBI and the finance ministry,” said Rupa Rege Nitsure, economist with the Bank of Baroda. “The money markets and government securities market will have to be prepared for a more stringent monetary environment.”

The yield on 10-year government bonds edged up to 7.84 per cent from 7.83 per cent ahead of the data, while the rupee was steady at 44.05 per US dollar.

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