Painting a grim picture of the evolving situation on the price front, the Reserve Bank of India [Get Quote] Governor YV Reddy today told Members of Parliament that the situation was unlikely to improve dramatically anytime soon.

An MP who attended the three-hour meeting with the RBI brass quoted Reddy as saying that the world economy had slipped into a state of "stagflation", a situation characterised by high inflation and low economic growth. Inflation in the Euro zone hit 4 per cent in June and the growth in the bloc is expected to slow sharply.

• Inflation, the silent killer

In India, economists have forecast that the inflation rate would average more than 10 per cent in the current fiscal, 2008-09, and have lowered their growth rate expectation to around 7.5 per cent, from 8.5-9 per cent earlier.

Reddy and Deputy Governor Rakesh Mohan were briefing the Parliamentary Standing Committee on Finance on the inflationary situation and the measures taken by the central bank to curb prices and dampen inflationary expectations.

Some committee members asked Reddy why India was facing a double-digit inflation when the western countries had been able to contain their inflation rates in the range of 3-4 per cent.

Reddy is said to have replied it was not proper to compare India with developed countries and the situation here was not as bad as in some other developing countries.

The members of the committee chaired by BJP MP Ananth Kumar also expressed concern over the increasing burden on home loan borrowers due to rising interest rates and questioned the effectiveness of interest rate hikes in curbing inflation.

The RBI is scheduled to review the monetary policy on July 29. Some analysts have forecast another round of rate increases by the central bank. Last month, it had raised the cash reserve ratio and the repo rate by 50 basis points each.

Another member of the committee Business Standard spoke with said while the central bank was creating a "liquidity crunch" within the country by squeezing the money supply, it continued to allow higher capital inflows into the stock market, which is adding to inflationary pressures.

Headline inflation, as measured by the wholesale price index, crossed the RBI's comfort level of 5.5 per cent in mid-February this year and accelerated to near 12 per cent this June, driven mainly by higher food and commodity prices.

Global crude oil prices, which have touched a record high, forced the government to raise retail fuel prices in the first week of June further pushing the present inflation rate up.