Bloomberg News

India Inflation Unexpectedly Eases; Still BRIC’s Fastest

July 16, 2012

India Inflation Unexpectedly Eases While Staying BRIC’s Fastest

India faces inflation threats from a slump in the rupee and a rise in food prices that may be exacerbated by the impact of a weaker-than-average monsoon on agricultural output. Photographer: Dhiraj Singh/Bloomberg

India’s inflation unexpectedly eased in June while exceeding 7 percent for a fifth straight month, indicating price pressures may limit room to join a monetary stimulus drive stretching from China to Europe.

The benchmark wholesale-price index rose 7.25 percent from a year earlier, after climbing 7.55 percent in May, the Commerce Ministry said in a statement in New Delhi today. The median of 36 estimates in a Bloomberg News survey was 7.61 percent.

Jumps in the cost of living in a nation where most people get by on less than $2 per day prevented the Reserve Bank of India from cutting interest rates last month even with economic growth at a nine-year low. Governor Duvvuri Subbarao said June’s inflation reading is “way above the threshold level,” adding the bank’s policy aims at “restraining demand.”

“The fall is not the start of any trend and inflationary pressures are still predominant,” said Mumbai-based Prasanna Ananthasubramanian, chief economist at ICICI Securities Primary Dealership Ltd. “The Reserve Bank will not take this as a big move and they will not cut rates now.”

The rupee, which has tumbled about 19.5 percent against the dollar in the past 12 months, weakened 0.3 percent to 55.3262 per dollar at the close in Mumbai. The BSE India Sensitive Index fell 0.6 percent, while the yield on the 8.15 percent government bond due June 2022 declined to 8.05 percent from 8.1 percent on July 13.

Inflation Risks

Subbarao announces his next rate decision on July 31, following a 0.5 percentage-point reduction to 8 percent in April. India faces inflation threats from the slump in the rupee and a rise in food prices that may be exacerbated by the impact of a weaker-than-average monsoon on agricultural output.

Subbarao said the comments he made today in a speech in Mumbai shouldn’t be interpreted as implying what the central bank may do at the policy review. On June 19, he said inflation exceeds acceptable levels and restraining it may require sacrificing economic growth.

In contrast, the People’s Bank of China, the Bank of Korea, the European Central Bank and the Bank of England have all eased policy this month to support their economies, while the Philippines said last week it has scope to do so. Indian inflation remains the fastest in the BRIC group of largest emerging markets that also includes Brazil, Russia and China.

Prices in the manufactured-products category rose 5 percent in June from a year earlier, today’s report showed. Food articles climbed 10.81 percent, while fuel and power increased 10.27 percent.

‘RBI Cautious’

Non-food manufactured goods prices, a measure of core inflation, rose 4.89 percent in June compared with 4.86 percent in May, according to calculations by Bloomberg.

“The steady core reading tells us that we are not yet in the clear,” Leif Eskesen, Singapore-based chief economist for India and Southeast Asia at HSBC Holdings Plc, said in a report. “With the monsoon delivering below-normal rains there are upside risks to food inflation. This is likely to keep the RBI cautious about easing at the next meeting.”

The central bank has to balance controlling inflation with promoting economic activity, Commerce Minister Anand Sharma told reporters in New Delhi after today’s release, adding India needs to keep the cost of credit low for industry to stay competitive.

Companies from retailers to manufacturers have raised prices in Asia’s third-largest economy. Indian steel producers, including Tata Steel Ltd. and Steel Authority of India Ltd., increased charges for the alloy used in constructing homes, bridges and power plants by about 8 percent this year.

Singh’s Vow

Prime Minister Manmohan Singh, who took charge of the Finance Ministry in June and has vowed to revitalize Indian growth, needs adequate monsoon rains to boost farm production and spur consumer demand.

About 70 percent of India’s 1.2 billion people live in the countryside and depend on agriculture. The monsoon accounts for more than 70 percent of annual rainfall and was 23 percent below a 50-year average since June 1, the weather bureau said July 12.

The Reserve Bank has previously flagged potential inflation threats from the nation’s fiscal deficit, which has been fanned in part by a subsidy program ranging from diesel to fertilizers.

Prices may rise as the government tries to curb the program to less than 2 percent of gross domestic product in the year that began April 1. The economy expanded 5.3 percent in the three months ended March from a year earlier, the slowest pace since 2003.

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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