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New Delhi: India's inflation held above the central bank's tolerance level for the sixth straight month, increasing the likelihood that incoming Governor Duvvuri Subbarao will raise interest rates.
Wholesale prices rose 12.34 per cent in the week to August 23 from a year earlier, the commerce ministry said in New Delhi on Thursday. That compared with a 12.4 per cent gain in the previous week and a median 12.44 per cent forecast in a Bloomberg News survey of economists.
Subbarao, whose three-year term at the Reserve Bank of India starts today, told Bloomberg Television on July 28 that raising rates was the "obvious" answer to surging prices.
Outgoing Governor Yaga Venugopal Reddy has increased the central bank's benchmark rate three times since June, putting the battle against inflation before economic growth.
"Inflation continues to be hugely distant from the Reserve Bank's target,'' said Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore. "We expect the central bank to raise the repurchase rate by another 50 basis points," he said. The Reserve Bank on July 29 raised its benchmark interest rate by a half point to a seven-year high of 9 per cent. The central bank's next policy announcement is due October 24.
Slowing growth
Elevated energy and commodity prices forced the central bank in July to raise its inflation forecast for the year to March 31 to 7 per cent from a previous target of between 5 per cent and 5.5 per cent.
India's 10-year bonds advanced for a ninth day as falling oil prices eased concern that inflation will accelerating further.
The yield on the benchmark 8.24 per cent note due April 2018 fell 14 basis points to 8.47 per cent at the 5:30pm close in Mumbai, according to the central bank's trading system.
"The government will look at supply-side stress,'' India's Commerce Minister Kamal Nath told reporters in New Delhi yesterday. "We have taken some steps and that appears to be working. We do hope it will continue to take effect in several weeks and months.''
Rising prices are eroding consumer spending and forcing companies to cut production. That may damage an economy forecast by the central bank to expand at the slowest pace in four years in the 12 months ending March.
India's economy grew 7.9 per cent in the three months to June 30, the weakest since the last quarter of 2004, the government said last week.
"The short-term growth prospects are now faced with several downside risks, both global and domestic,'' the Reserve Bank said in its August 29 annual report.
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