Inflation soared to a 16-year high and may accelerate further after the government approved wage increases for civil servants. Wholesale prices rose 12.44% in the week to 2 August, after rising 12.01% in the previous week, the commerce ministry said on Thursday. Economists were expecting a 12.2% gain.
On Thursday, Prime Minister Manmohan Singh’s cabinet approved an average 21% salary increase for around five million government employees. That may give the Reserve Bank of India (RBI) little choice other than to raise interest rates again after three increases since June.
“We expect inflation to remain elevated and reach 13.5% by December,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd in Mumbai. “We are looking at a 50 basis points increase for both the repurchase rate and the cash reserve ratio by year-end.”
The country’s 10-year bonds fell for a third day, their worst run in almost a month, on accelerating inflation. The yield on the benchmark 8.24% note due April 2018 climbed 5 basis points to 9.14% at close in Mumbai, according to RBI’s trading system.
The central bank 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%. Governor Y.V. Reddy is targeting inflation at 7% in the year to March.
Prime Minister Singh’s economic advisory council on Wednesday said RBI needs to keep monetary policy “tight” amid rising prices.
Faster inflation, coupled with a global slowdown, may weaken growth in India’s $912 billion (Rs39 trillion) economy to the slowest in four years, the panel said.
Finance minister P. Chidambaram on Thursday said the impact of increased salaries on inflation was taken into account when the cabinet approved the proposal.
Soaring energy and commodity prices are fanning inflation across Asia. Pakistan’s inflation accelerated to a 30-year high of 24.33% in July. Consumer prices in Indonesia jumped 11.9% last month, the biggest gain in two years.
Inflation in India in the week to 2 August accelerated due to a rise in the cost of pulses, fruits, spices and aviation turbine fuel. Fuel price inflation rose to 17.99%, compared with 17.12% in the previous week, Thursday’s report showed.
Fuel costs increased after Indian Oil Corp. Ltd, the nation’s largest refiner, raised the price of jet fuel by 2.9% on 1 August to Rs2,043.03 a kl.