New Delhi: Inflation held above the central bank’s tolerance level for the sixth straight month, increasing the likelihood that incoming governor D. Subbarao will raise interest rates.
Wholesale prices rose 12.34% in the week to 23 August from a year earlier, the commerce ministry said on Thursday. That compared with a 12.4% increase in the previous week.
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Subbarao, whose three-year term at the Reserve Bank of India (RBI) starts on Friday, had said in July that raising rates was the “obvious” answer to surging prices. Outgoing governor Y.V. 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.”
RBI had on 29 July raised its benchmark interest rate by a half point to a seven-year high of 9%. The bank’s next policy announcement is due on 24 October.
Elevated energy and commodity prices forced RBI in July to raise its inflation forecast for the year to March to 7% from a previous target of between 5 and 5.5%.
India’s 10-year bonds advanced for a ninth day as falling oil prices eased concern that inflation will accelerate further.
The yield on the benchmark 8.24% note due April 2018 fell 14 basis points to 8.47% in Mumbai.
“The government will look at supply-side stress,” commerce minister Kamal Nath said on Thursday. “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.
“The short-term growth prospects are now faced with several downside risks, both global and domestic,” RBI said in its 29 August annual report.
Consumer price inflation for agricultural and rural workers accelerated to 9.41% in July, compared with 8.77% for farm workers and 8.75% for rural workers in June.
The government releases separate indexes on consumer prices paid by industrial, agricultural and rural workers. The most widely tracked measure for inflation is the wholesale price index.
Prices of fruits, spices, sugar, tea and eggs rose in the week to 23 August, while prices of vegetables, pulses, edible oil and cereals declined, Thursday’s report showed. Manufactured price inflation rose 11.28%, compared with 11.02% in the previous week.
The commerce ministry on Thursday raised its inflation estimate for the week ended 28 June to 12.03% from 11.89%.
(Bibhudatta Pradhan contributed to this story.)