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New Delhi: India's inflation accelerated to a 13-month high, constraining the central bank's ability to cut interest rates to arrest an economic slowdown.
Wholesale prices rose 6.68 per cent in the week ended March 15 from a year earlier, faster than the previous week's 5.92 per cent, the Ministry of Commerce and Industry said in New Delhi. A Bloomberg survey of 14 economists forecast a 5.96 per cent gain.
JPMorgan Chase and HSBC in the past week reversed their earlier forecasts of a reduction in rates by July, betting the central bank will now keep them unchanged at a six-year high.
Finance Minister Palaniappan Chidambaram yesterday said the central bank will have to "balance" growth and inflation objectives while estimating the economy will expand at the slowest pace in four years in the next 12 months.
"Policy makers are now operating with fewer degrees of freedom," said Rajeev Malik, senior econ-omist at JPMorgan Chase in Singapore.
"Monetary policy measures will be important if the government and the Reserve Bank of India are serious about managing inflation expectations."
The yield on the benchmark nine-year bond gained 10 basis points to 7.88 per cent at 1:50 p.m. in Mumbai, the highest since December 18.
India's rupee rebounded after the inflation data and is headed for the biggest weekly advance since September on speculation policy makers will allow gains in the currency to temper rising prices. The rupee gained 1.04 per cent this week to 40.015 per dollar as of 1:50pm in Mumbai, according to data compiled by Bloomberg. The currency fell earlier on Friday to 40.155.
Food prices
The inflation rate has almost doubled since the last week of November, stoked by food and commodity costs. Manufacturing price inflation is also catching up now, accelerating to a one- year high of 6.27 per cent in the week ended March 15 from 4.21 per cent at the start of the month.
Prices are rising at a time when more than three years of interest-rate increases and a global economic slowdown are threatening to disrupt India's record expansion since 2003. Chidambaram expects the $906 billion economy, Asia's third- biggest, to grow around 8 per cent in the next 12 months, the weakest pace since 2005.
"The main risks to inflation still relate to fuel and food," said Robert Prior-Wandesforde, senior economist at HSBC in Singapore, who expects inflation to average 6.2 per cent in the year starting April 1.
"If our inflation projections are right, then the central bank and the government face an even tougher year than we thought previously."
The People's Bank of China, which raised interest rates six times last year, is also trying to combat inflation at an 11- year high without derailing the economy.
Reserve Bank of India Governor Yaga Venugopal Reddy kept the key repurchase rate unchanged at 7.75 per cent in the last monetary policy announcement on Jan. 29. The next statement is scheduled for April 29.
Reddy has raised the central bank's key policy rates nine times since October 2004 and the cash reserve ratio, or the proportion of deposits commercial banks need to place with the central bank, five times since December 2006.
"At the moment, we're assuming that commodity prices will remain high because of demand," Chidambaram said yesterday in an interview.
"We've therefore taken fiscal steps to reduce the costs of commodities. We have to remain vigilant and flexible and take such steps depending upon how the prices play out."
Rice and wheat
Crude and edible oils are among India's biggest imports and their costs have risen more than three times since the current government came to power in 2004, Chidambaram said.
The international prices of maize, rice and wheat, staple items of food in India, have either doubled or tripled between 2004 and 2008, he said.
To contain prices, the government last month cut import taxes on edible oil for the fifth time in 15 months and stopped exports of wheat, sugar, rice and edible oils.
India yesterday withdrew a rule that allowed exporters of steel, cement, chrome and manganese ore duty-free imports of some raw materials equivalent to the value of exports, to bolster domestic supplies and check inflation.
The government yesterday increased the minimum export price for rice to boost local supplies and drive down prices.
Rising concern, says minster
New Delhi: Indian Trade Minister Kamal Nath said on Friday rising inflation was a matter of concern and the government was trying to increase supplies of key commodities to check prices.
He also said the government was considering a ban on all non-basmati rice exports.
Nath's ministry on Thursday raised the minimum price for rice non-basmati exports to $1,000 a tonne from $650, effectively ending exports of all but highest grades of rice.
"Any rise in inflation is a matter of concern," Nath told reporters. "We are trying to see how much supply side could be managed."
- Reuters
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