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Inflation stays above 10% in June, eyes on RBI

Inflation stays above 10% in June, eyes on RBI
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First Published: Wed, Jul 14 2010. 03 58 PM IST
Updated: Wed, Jul 14 2010. 03 58 PM IST
New Delhi: India’s annual headline inflation remained above 10% for the fifth straight month in June, cementing expectations the Reserve Bank of India (RBI) will raise interest rates for a second time this month to contain surging prices.
The wholesale price index rose 10.55% from a year earlier, marginally below the median forecast for a 10.8% rise in a Reuters poll and above May’s pace of 10.16%.
However, the figure for April was revised sharply higher on Wednesday to 11.23% from an earlier 9.59%, continuing a recent pattern of upward revisions and suggesting that inflationary pressures in coming months may be even stronger than policymakers had feared.
The revised April reading was the highest since September 2008, Reuters Ecowin data showed.
“I won’t be surprised if the June numbers will be revised to 10.8 or 11%.
Given the fuel price increase, I don’t see any reason for headline inflation to be less than 11 percent in June,” said N R Bhanumurthy, professor at National Institute of Public Finance and Policy in New Delhi.
New Delhi increased fuel prices late last month, a move that is expected to add about one percentage point to inflation. The higher fuel prices came into effect on June 26, so their full impact will only be reflected in data for July.
Indian officials remained hopeful that inflation would decline sharply later this year, reaffiriming forecasts that it will moderate to 5 or 6% by December.
But government forecasts have consistently underestimated inflation in recent quarters and official predictions of an easing in price pressures depend on a strong harvest bringing down food prices.
“After the kharif (summer crop) season is over, that will have a moderating influence. It is already being felt on food items ... It will further moderate WPI,” finance minister Pranab Mukherjee said on Wednesday.
Markets were little moved by Wednesday’s data, which reinforced expectations the central bank will raise rates by another 25 basis points (bps) at a policy review on 27 July.
The RBI surprised markets earlier this month by lifting policy rates by a quarter point, its third hike so far this year and nearly a month ahead of the scheduled quarterly review.
Bond yields rose sharply after May inflation data was released last month but have eased as the RBI reiterated its commitment to a calibrated return to normal monetary policy.
At 0913 GMT, the yield on the benchmark 10-year bond was 7.64%, just above its 7.62% Tuesday close. The one-year swap rate was at 5.65% after the data. It closed at 5.64% on Tuesday.
Emerging markets led by China and India have been leading the global economic recovery, and Thailand on Wednesday became the latest Asian economy to begin returning monetary policy to pre-crisis levels by lifting interest rates for the first time since the global downturn. South Korea did the same on Friday.
India’s economy is on track to grow at 8.5% in the current fiscal year, from 7.4% last year.
More Rate Rises Expected
Soaring prices have prompted protests against the government. Opposition parties last week called a one-day nationwide strike to protest the increase in fuel prices.
“The RBI has been proactive in hiking rates three times over the last few months, but today’s data shows they still have more work to do,” said Brian Jackson, senior emerging markets strategist at Royal Bank of Canada in Hong Kong.
The June data was slightly below expectations as a rise in manufacturing prices was lower than expected, while food inflation cooled somewhat. Annual food inflation eased to 14.60% in June from 16.49% in the prior month.
Even if this summer’s monsoon rains are better than expected it may not be enough to cut inflation in half by the end of 2010, as government officials predict, although the effect of last year’s high base will help.
“Annual food inflation could come down to 5-6% by end-December if the summer harvest is good. But the WPI inflation is unlikely to ease to that level by then,” said D K Joshi, principal economist at Crisil, who expects headline inflation of around 7% in March 2011.
Manufacturing inflation in India picked up to 6.66% in June from 6.41% in May, while fuel inflation accelerated to 14.32% in June from 13.05% in the previous month.
The recent hikes in fuel prices could stoke broader inflation further if companies pass on the higher costs to consumers.
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First Published: Wed, Jul 14 2010. 03 58 PM IST
More Topics: Inflation | WPI | RBI | Interest rates | Monsoon |