India inflation up again, cbank action seen soon

NEW DELHI - Indian inflation rose further above 8 percent in late May and is expected to keep climbing to a 13-year peak this month, which analysts said will prompt the central bank to take action soon to try to ease price pressures.

By (Reuters)

Published: Fri 6 Jun 2008, 8:21 PM

Last updated: Sun 5 Apr 2015, 1:07 PM

Reserve Bank of India Governor Y.V. Reddy said on Thursday the central bank was ready to employ the full range of instruments at its disposal to deal with inflation. Analysts said the authority could tighten policy in coming weeks.

"Inflation remains high and needs to be tackled. We believe the Reserve Bank of India may hike the reverse repo and the repo rate by 25 basis points by July," Shuchita Mehta, economist at Standard Chartered Bank in Mumbai, said.

India's wholesale inflation, the most closely watched measure, has more than doubled since late last year as the economy felt the impact of rising costs for raw materials and food.

India's wholesale price index rose 8.24 percent in the 12 months to May 24, the highest level in more than 3 “years, data showed on Friday.

That was above a week-earlier level of 8.10 percent but broadly in line with a median forecast in a Reuters poll of 8.29 percent. Financial markets were largely unchanged after the data.

Analysts expect the rate of inflation to keep climbing after the communist-backed ruling coalition agreed on Wednesday, following 10 days of debate, to raise state-set petrol and diesel prices by about 10 percent.

The rise was bigger than expected as India joined a growing number of other Asian countries no longer able to afford big subsidies in the face of rising prices.

Energy costs account for 14.2 percent of the inflation index, and the price increases will have a cascading impact on overall prices as diesel and petrol are key inputs through the economy.

Previous figures have been revised sharply higher in recent data, but Friday's release showed a much smaller revision. For the year to March 29, wholesale inflation was revised up to 7.75 percent from 7.41 percent reported initially.

Still, the inflation figure remains much higher than the 5-5.5 percent the central bank had set as its comfort level for the 2007/08 financial year ending in March.

Anxious government

A Reuters poll earlier this week forecast that the fuel price increases would push wholesale inflation to a 13-year high of 9.2 percent on June 7.

Finance Minister Palaniappan Chidambaram admitted inflation was a problem for India as elsewhere, and said the government was willing to take more measures to calm prices.

"The government of India, like governments all over the world, is fighting inflation. We have taken fiscal, monetary and administrative measures and we are willing to take more measures," Chidambaram said in a statement.

"The United Progressive Alliance is confident that it will ... overcome the current difficulties and ensure, in the medium to long term, robust and inclusive growth with price stability," he said, giving the full name of the ruling coalition.

Some analysts said the Reserve Bank of India (RBI) may increase reserve requirements to try to tame inflation, fearing a rise in interest rates would dampen growth, which is already expected to ease to 8-8.5 percent this fiscal year from 9 percent in 2007/08.

"Our view remains that the RBI will tighten monetary policy using cash reserve ratio hikes, (and) we expect another 100 basis points worth of CRR hikes this year," said Sonal Verma, an economist at Lehman Brothers in Mumbai.

Since December 2006, the central bank has raised its cash reserve ratio by 3.25 percentage points to a seven-year high of 8.25 percent. But it has left interest rates steady for more than a year.

Markets were largely unchanged from before the data's release with the 10-year bond yield steady at 8.23 percent and the rupee at 42.80/81 to a dollar.

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