Bloomberg News

India Inflation Quickens to 9.44%, Adding to Rate Pressure

July 14, 2011

(Updates with bond, stock market close in sixth paragraph.)

July 14 (Bloomberg) -- India’s inflation accelerated, sustaining pressure on the central bank to tighten monetary policy this month, even as price gains that were less than economists estimated boosted optimism the longest stretch of interest-rate increases in a decade is nearing an end.

The benchmark wholesale-price index rose 9.44 percent in June from a year earlier after a 9.06 percent jump in May, according to the commerce ministry. The median of 28 estimates in a Bloomberg News survey was for a 9.68 percent increase. Food-price inflation quickened to a three-week high of 8.31 percent in the week ended July 2, the ministry said in a separate statement today.

The Reserve Bank of India may raise rates this month even after Mumbai was hit yesterday by the biggest terrorist attack since November 2008, economists said. India has persisted with monetary tightening, while neighbors from Malaysia to Indonesia refrained from raising rates in July on concern that Europe’s debt crisis and slowing U.S. growth will hurt Asian economies.

“The central bank’s stance will be governed by inflation,” Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., said before the report. “These attacks are unlikely to have any material impact on the economy.”

Rate Stance

She predicted the central bank will increase its repurchase rate by a quarter of a percentage point to 7.75 percent in the next policy announcement on July 26. The Reserve Bank has raised borrowing costs 10 times since the start of 2010.

The yield on the 7.8 percent government bonds due April 2021 fell two basis points, or 0.02 percentage point, to 8.24 percent at the 5 p.m. close in Mumbai from 8.26 percent before the report was published. It climbed to as much as 8.28 percent earlier in the day. The Bombay Stock Exchange’s Sensitive Index rose 0.1 percent after surging as much as 1.1 percent. The rupee was little changed at 44.49 against the dollar.

Three bomb blasts in Mumbai yesterday killed at least 17 people and injured 133 others, according to a statement from the home ministry. Yesterday’s attack is the first in the nation’s financial capital since Pakistani gunmen killed about 160 people in 2008.

Inflation accelerated in June because of an increase in diesel costs and higher prices of minerals and manufactured products, Finance Minister Pranab Mukherjee said in a statement today. He said the government is working with the central bank to take “appropriate” steps to cool prices to a “comfortable level.”

Diesel Costs

Prime Minister Manmohan Singh’s government on June 24 allowed state-run refiners including Indian Oil Corp. to increase diesel prices by 3 rupees (7 cents) a liter, kerosene by 2 rupees a liter and cooking gas by 50 rupees for every 14.2 kilogram bottle. The decision was aimed at reducing subsidies and helping limit losses at companies selling fuels below cost.

“The fuel price hike is yet to seep into the economy,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai. “Inflation will remain in double digits until November as its impact plays out.”

He expects the Reserve Bank to increase borrowing costs by a quarter point this month.

By contrast, Federal Reserve Chairman Ben S. Bernanke yesterday signaled the central bank has more tools for monetary easing should the U.S. economy weaken.

U.S. Growth

Economic growth in the U.S. slowed to a 1.9 percent annual pace in the first quarter from 3.1 percent in the previous three months.

In Europe, Ireland joined Portugal and Greece as the third euro-area nation to have its credit rating reduced to below investment grade as Moody’s Investors Service cut its rating to Ba1 this week, while European Union finance ministers struggle to contain the region’s sovereign debt crisis.

Curbing inflation is the top agenda for India’s policy makers as price gains erode spending power in a nation where the World Bank estimates more than three-quarters of the people live on less than $2 a day.

Reserve Bank Governor Duvvuri Subbarao said last month that “domestic inflation risks remain high,” and that “some short- run deceleration in growth may be unavoidable in bringing inflation under control.” India’s economy may grow “around 8 percent” in the year through March from 8.5 percent in the previous 12 months, he estimated.

India’s industrial production rose 5.6 percent in May from a year earlier, the least since August 2010, the Central Statistical Office said this week.

“From the perspective of the central bank, their role is still to try to contain inflation from getting out of hand regardless of the episode,” David Cohen, a Singapore-based economist for Action Economics, who previously worked at the U.S. Federal Reserve, said referring to yesterday’s attacks.

--With assistance from Manish Modi and Kartik Goyal in New Delhi. Editors: Cherian Thomas, Sunil Jagtiani

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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