New Delhi: Inflation accelerated to the fastest pace in more than 16 years, increasing the likelihood the Reserve Bank of India, or RBI, will raise interest rates for a fourth time since June.
Wholesale prices rose 12.63% in the week to 9 August, after increasing 12.44% in the previous week, the commerce ministry said on Thursday.
That matched the median forecast in a Bloomberg survey of economists.
Inflation may climb higher after Prime Minister Manmohan Singh’s cabinet last week approved an average 21% pay rise for five million civil servants, ahead of the general election due in May.
That may prompt RBI to add to three rate increases since June, economists said.
“The whole objective of monetary policy at this point in time, which is to contain and manage demand, is going to face some hurdles,” said Shubhada Rao, an economist with Mumbai-based Yes Bank Ltd. “The pay revision is clearly going to add to demand pressures on inflation.”
Stocks declined on Thursday on concern faster inflation will crimp consumer spending and add to slowing economic growth.
The Bombay Stock Exchange’s benchmark Sensitive Index, or Sensex, fell 3%, to 14,243.73 at the 3.30 pm close on Thursday.
Bonds too declined. The yield on the benchmark 8.24% note due April 2018 rose 7 basis points to 9.21%.
RBI last month raised its inflation forecast for the year to 31 March to 7% from a previous target of between 5% and 5.5%.
The bank’s next policy announcement is due on 24 October.
“The focus of monetary policy has to be on inflation till it comes down,”Arvind Virmani, finance ministry’s top economist, said in an 18 August interview.
Inflation is likely to remain high and will take at least 12 months before it moderates to RBI’s “tolerance” level of 5%, he said.
RBI last month raised its benchmark rate by a half point to a seven-year high of 9%. The reserve requirement for commercial lenders was also lifted to 9% from 8.75%.
Inflation in the country in the week to 9 August accelerated because of a rise in the cost of pulses, cement, vegetables, sugar and textiles.
Manufactured price inflation rose 10.91%, compared with 10.75% in the previous week, Thursday’s report showed.
Higher input costs are forcing companies such as Hero Honda Motors Ltd, India’s biggest motorcycle maker, to raise prices.
Hero Honda last week increased prices of its motorcycles by as much as Rs1,500 to counter higher steel costs.
Increased interest costs will have an “impact” on domestic demand in India, the fastest growing major economy after China, Virmani said.
“Our forecast range for the economy has been between 8 and 9% and developments since March suggest the likelihood of it being near the bottom of that range is higher now,” he said.
Asia’s third largest economy is expected to expand 7.7% in the 12 months to March, compared with an estimated 9% a year earlier, according to a report last week from prime minister’s economic advisory council.
That would be the slowest pace of expansion in four years.
The government may revise Thursday’s preliminary wholesale price estimate in two months after receiving additional data. The commerce ministry on Thursday raised its inflation estimate for the week ended 14 June to 11.8% from 11.42%.