Saturday 2 February 2008

India Inflation Unexpectedly Quickens to 5-Month High

India's inflation unexpectedly accelerated to a five-month high, vindicating the central bank's decision this week to refrain from cutting interest rates.

Wholesale prices rose 3.93 percent in the week ended Jan. 19 from a year earlier, faster than the previous week's 3.83 percent, the Ministry of Commerce and Industry said today in New Delhi. Analysts had forecast inflation at 3.82 percent.

Inflation may quicken further as Prime Minister Manmohan Singh prepares to raise fuel prices next week for the first time in more than 18 months. Concerns about rising prices prompted the Reserve Bank of India to keep its benchmark interest rate unchanged near a six-year high this week.

Higher oil and food costs ``pose the risk of aggravating inflation risks,'' the central bank said in its monetary policy statement on Jan. 29. Inflation is ``suppressed'' as it doesn't take into account last year's surge in crude-oil prices.

Bonds pared gains after the inflation report. The price of the most-traded 7.99 percent note due July 2017 traded at 103.28, down from 103.4 earlier. The security closed at 103.17 yesterday.

Prime Minister Singh's Cabinet may consider raising gasoline and diesel prices next week to reduce losses at state- run refiners, Oil Minister Murli Deora said yesterday.

India hasn't allowed increases in gasoline and diesel costs since June 2006 to protect consumers and curb inflation even as crude oil prices rose 57 percent last year and reached a record $100.09 a barrel on Jan. 3.

Price Controls

The government's price controls have helped curb inflation, which reached a more than two-year high of 6.69 percent in January 2007.

India's central bank in its Jan. 29 monetary policy announcement left the repurchase rate unchanged at 7.75 percent, maintained the reverse repurchase rate at 6 percent, and held its cash reserve ratio at 7.5 percent.

``The message of the monetary policy is that curbing inflation remains the highest priority for the Reserve Bank,'' said Prasanna Ananthasubramaniam, a fixed-income analyst at ICICI Securities Ltd. ``We expect cut in rates between April and July, depending upon how the global situation pans out.''

The Reserve Bank may come under pressure after the U.S. Federal Reserve cut the benchmark interest rate by half a percentage point to 3 percent on Jan. 30, the second cut in nine days, to avert a recession in the world's largest economy.

`Global Uncertainties'

``We are in a period of considerable global uncertainties,'' Finance Minister Palaniappan Chidambaram said yesterday. ``We have to constantly bear in mind that our policies have to be adjusted rapidly depending upon the evolving international situation.''

The U.S. Fed rate cut may push capital inflows and fuel inflation in India, Asia's third-largest economy.

``It's too early to say,'' what impact the Fed rate cut will have on the Indian economy and it would better to ``wait for a day or two,'' Chidambaram said.

India today revised the inflation rate for the week ended Nov. 24 to 3.11 percent from 3.01 percent. The government revises the inflation rate after a delay of two months on additional price data.


                       Week Ended   Week Ended   Percentage
Jan. 19 Jan. 12 Change

Primary articles 222.8 222.1 0.3
Fuel, power 334.4 334.1 0.1
Manufactured products 188.9 188.7 0.1
Food articles 219.9 219.9 unchanged
Fruits 251.2 249.8 0.6
Food products 195.7 194.9 0.4
Edible oils 179.2 177.9 0.7
Cement 219.9 219.9 unchanged
Total 217.1 216.7 0.2