Bloomberg News

India Inflation Quickens to 9.06%, Adding Pressure on Rates

June 14, 2011

(Updates with rupee, bond yield in fifth paragraph.)

June 14 (Bloomberg) -- India’s inflation exceeded analysts estimates, adding pressure on the central bank to extend the fastest round of interest-rate increases among Asia’s major economies. Bond yields and the rupee gained.

The wholesale-price index rose 9.06 percent from a year earlier after an 8.66 percent jump in April, the commerce ministry said in a statement in New Delhi today. The median estimate of 22 economists in a Bloomberg News survey was for an 8.74 percent increase.

The Indian economy may be “overheating” and further rate rises are warranted, Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC said yesterday, as well as calling for similar action in China. The Reserve Bank of India may boost borrowing costs June 16 for the 10th time since mid-March 2010, 15 of 17 economists in a Bloomberg News survey said.

“Inflation is a big worry and policy makers’ objective would be to fight the price gains rather than worry about growth,” Samiran Chakraborty, Mumbai-based chief economist at Standard Chartered Plc, said before the report. He expects India’s central bank to boost its benchmark repurchase rate by a quarter of a percentage point to 7.5 percent.

Yields Gain

The yield on the 7.8 percent notes due April 2021 rose nine basis points, or 0.09 percentage point, to 8.33 percent as of the 5 p.m. close in Mumbai, and the rupee appreciated 0.3 percent to 44.745 per dollar, the biggest gain in two weeks. The Bombay Stock Exchange’s Sensitive Index advanced 0.2 percent.

Reserve Bank Governor Duvvuri Subbarao said last month he was willing to risk a slowdown in growth to curb price pressures, which undermine spending power in a nation where the World Bank estimates three-quarters of the people live on less than $2 a day.

India’s factory production growth eased in April, with output rising 6.3 percent from a year earlier after an 8.8 percent gain in March, the statistics office said last week.

The government’s focus should be to bring down the inflation rate to a range of 4 percent to 5 percent, Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said June 2 as he urged policy makers to use all monetary and fiscal tools.

China Inflation

In China, the central bank today ordered lenders to set aside more cash as reserves after inflation accelerated to 5.5 percent in May, the fastest pace in almost three years, and industrial output grew more than economists forecast.

China has boosted interest rates four times since September, increased banks’ reserve requirements to a record and allowed the yuan to gain about 1.6 percent against the dollar this year.

Roubini said yesterday in Singapore that China’s inflation may remain elevated after excessive monetary growth and advocated faster yuan gains as one remedy. He said the “optimistic” view is that price gains will moderate on so- called base effects and a moderation in commodity prices.

In India “growth has been robust and inflation has picked up, and now policy rates are going to be negative in real terms,” said Roubini, who was among analysts to predict the global financial crisis of 2007-2009. “Further tightening is reasonably warranted.”

Consumer Demand

India’s gross domestic product rose 7.8 percent in the three months ended March 31 from a year earlier, the weakest pace in five quarters, government data show. Still, the expansion is the quickest after China among large economies, bolstered by higher incomes in the nation of 1.2 billion people.

Salaries in India in 2011 will likely rise the most in the Asia-Pacific region, a survey by Aon Hewitt LLC showed March 8. Government spending under the National Rural Employment Guarantee Act of 2005 has surged almost fourfold to 399 billion rupees ($8.9 billion), propping up demand in the countryside.

Inflation may quicken as economists expect food costs to rise after Prime Minister Manmohan Singh’s coalition increased the prices it pays farmers for food grains and oilseeds. The federal government sets the crop prices to assure farmers’ incomes, while selling subsidized grains and cooking oils to the poor.

Prices may also be under pressure as India plans to allow state-run refiners such as Indian Oil Corp. to increase diesel tariffs.

A panel of Indian ministers will meet “shortly” to consider raising fuel costs, oil minister S. Jaipal Reddy said yesterday. The state-run refiners had a revenue loss of 450 billion rupees in the first quarter from selling fuel below cost, Reddy said.

--With assistance from Manish Modi in New Delhi and Shamim Adam in Singapore Editors: Cherian Thomas, Sam Nagarajan

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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