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New Delhi: India's inflation accelerated to the fastest pace since 1995, vindicating the central bank's decision to raise borrowing costs for the third time in two months.
Wholesale prices rose 11.98 per cent in the week to July 19, after gaining 11.89 per cent in the previous week, the commerce ministry said in New Delhi. Economists had expected a 12.03 per cent increase.
Governor YV Reddy this week raised the central bank's repurchase rate by a half-percentage point to 9 per cent, sacrificing growth to tame runaway inflation.
The Reserve Bank of India may increase the benchmark rate again in the next three months, according to economists in a Bloomberg News survey.
"The message is clear that inflation will dominate over growth," said Sonal Varma, a Mumbai-based economist at Lehman Brothers. "We expect growth to slow to 7.3 per cent this fiscal year due to rising headwinds from sharp rate increases, rising commodity prices and slackening foreign demand."
Reddy, due to retire in September, this week also raised the cash reserve ratio to 9 per cent from 8.75 per cent and said the bank had "headroom" to further tighten monetary policy.
Higher energy and commodity prices are fuelling inflation across Asia, prompting central banks to raise borrowing costs.
Stable
"Inflation, on a week-on-week basis, has continued to remain stable," the finance ministry said in a statement yesterday.
Inflation in the week accelerated because of an increase in the prices of pulses, fruits, spices and sugar. The manufactured price inflation rose 10.82 per cent in the week ended July 19, compared with a 10.72 per cent gain in the previous week, yesterday's report showed.
The RBI raised its year-end inflation forecast to 7 per cent from 5.5 per cent and lowered its growth estimate for the year ending March 2009 to 8 per cent from an earlier prediction of 8 per cent to 8.5 per cent.
Economists expect inflation to remain at elevated levels in the coming months. "We expect double-digit inflation to continue," said Rohini Malkani, an economist at Citigroup in Mumbai "We expect the Reserve Bank to maintain its tightening stance using a combination of the repurchase rate and the cash-reserve ratio."
Rising interest rates have led to increased monthly loan payments for borrowers, resulting in defaults, and are hurting profits at lenders including State Bank of India and ICICI Bank.
State Bank this week reported the slowest profit growth since 2006 and net income at ICICI Bank dropped 6 per cent.
Faster inflation and record-high borrowing costs are also affecting vehicle sales. Purchases of two-wheelers, cars and trucks grew 6.6 per cent in June, slower than the 8.1 per cent increase in May, according to the Society of Indian Automobile Manufacturers.
The government may revise yesterday's preliminary wholesale- price estimate in two months after receiving additional data. The commerce ministry yesterday raised its inflation estimate for the week ended May 24 to 8.9 per cent from 8.24 per cent.
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