India’s inflation rate accelerates as food prices rise

Filed on February 2, 2007

NEW DELHI - India’s inflation rate inched up close to a two-year high as government efforts to staunch rising prices of food and fuel wait to kick into the economy, data released on Friday showed.

Inflation measured by the wholesale price index -- the most closely watched cost-of-living monitor -- accelerated to 6.11 percent for the week ended January 20 from 5.95 percent the previous week and 4.24 percent a year earlier, the government said.

The rate had reached 6.12 percent in the week ended January 6, the highest since December 2004 when it stood at 6.56 percent, prompting the Reserve Bank of India to raise its key short-term borrowing rate by a quarter percentage point on Wednesday to 7.5 percent.

The rate is hovering above the 5.5 percent tolerance limit set by the Reserve Bank, which has been using a variety of tools to fight inflation since it began a tightening cycle in late 2004.

In December, it boosted the amount of money that banks must keep with the central bank, raising the cash reserve ratio by 50 basis points to 5.5 percent in a bid to suck out cash from the banking system and tame credit growth that’s fuelling economic expansion.

The government has also cut customs duties on cooking oil, cement and other products in a bid to lower prices. Such efforts will take time to work, the Press Trust of India cited unnamed government officials as saying Friday.

Rising prices of food including pulses, fruit, vegetables, eggs and sugarcane as well as textiles and wool, metals and paper spurred the headline inflation figure back above the six percent mark in the week to January 20.

The Congress-led government -- mindful that rising costs can be political dynamite among India’s poor masses who helped propel it to power in 2004 -- has said “price stability is one of the highest priorities” but it is also keen to avoid any sharp monetary tightening that could choke growth.

India’s economy grew by 9.1 percent in the first half of the financial year while credit growth has been expanding by over 30 percent annually.

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