Indian Inflation Surges
“It is indeed a very difficult time and naturally we would have to look at stronger measures on the demand side and on the monetary side,” said P. Chidambaram, without providing details. “I hope people will understand the difficulties we face.”
India’s wholesale price inflation rate in the week ending June 7 stood at 11.05% compared with a year earlier, the highest since February 1995. The inflation rate was 8.75% in the previous week. India doesn’t calculate wholesale price inflation on a monthly basis. The next set of weekly figures is due June 27.
Analysts expect inflation to keep rising at least until the end of September because of high global and domestic oil prices. India’s government recently raised fuel prices by about 10% to ease the burden on government subsidies, which keep the fuel price artificially low.
Government bonds and shares fell sharply on the inflation data on expectations of further monetary tightening by the central bank. India’s benchmark index, the Sensex, closed 3.4% lower at 14571.29.
Economists warn that India’s red-hot economy could slow further. Moody’s Economy.com predicts gross domestic product growth of 7.6% in the year ending March 31, 2009. GDP growth for the year ended March 31 was 9.0%.
Rising inflation puts India’s coalition government, the United Progressive Alliance, led by the Congress Party, in a difficult position. In a country where a large chunk of the population lives in poverty, inflation is a powerful campaigning point for opposition politicians.
India’s government must hold a general election by May next year. Rising inflation was cited as a key reason why the Congress Party lost state elections in the southern state Karnataka in May, following defeats in several other states. “With the general election fast approaching … the government’s worst inflationary nightmares are coming true,” said HSBC economist Robert Prior-Wandesforde in an email.
Analysts predict that the Reserve Bank of India may undertake further monetary tightening by raising short-term interest rates or the amount of cash banks must keep in reserve, or both. The central bank will provide updates on its monetary policy July 29, but action could come before then, some say. “In the current environment, if global commodity prices rise further even by a small amount, we believe the RBI will swiftly respond by another inter-meeting rate hike,” said Morgan Stanley economists in a report.
In a surprise move June 11, the central bank raised the repo rate, or its short-term lending rate, by 0.25 percentage point to 8%.
Analysts don’t expect inflationary pressure to ease anytime soon as the June 5 increase in the retail prices of fuel starts taking effect and global oil prices remain high.
The government has introduced a slew of fiscal measures to curb price rises. It has scrapped import tariffs on crude edible oil and cut those on refined edible oil. It also banned the export of non-basmati rice and urged cement and steelmakers to keep their prices at current levels. But the full impact of these measures won’t be felt until later in the year, economists said.
By ABHRAJIT GANGOPADHYAY and JACKIE RANGE