The warning from Mint Road, the headquarters of the Reserve Bank of India, early last week, was loud and clear: rising prices threaten to overheat the economy and the RBI could revert to a high interest rate regime to slow down consumer demand.

Government data indicates that inflation is raising its head again. Food articles, led by pulses, sugar and cereals, have shot up over 25 per cent at the retail level in the last few months, and despite the import of foodgrains, prices show no signs of a let up.

The Consumer Price Index (CPI) is hovering close to 7 per cent and the wholesale price index touched 5.41 per cent last week. The CPI inflation for industrial workers was placed far higher at 6.3 per cent in August 2006 against 3.5 per cent a year ago. Clearly, consumers are paying more for food and rising prices are eating into their savings.

Worse, projections of the current season’s crop are not encouraging. The Agriculture Ministry estimates kharif foodgrain production at 105.22 million tonnes, far below the target of 115.25 million tonnes and even lower than 109.70 million tonnes recorded last year. These early estimates might be revised as the outcome for the kharif season becomes clearer by November-end.

“Though there are no signs of overheating as of now, the need to monitor all available indications that point to excess aggregate demand is perhaps more relevant now than ever before,” says RBI governor Y.V. Reddy.

Economists say that by December, inflation would rise by one percentage point due to flat kharif production figures.

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