New Delhi: Headline inflation as represented by the wholesale price index in February unexpectedly accelerated to 8.31% compared to 8.23% in the previous month, ahead of the key monetary policy review by the central bank on 17 March.
Analysts were expecting annual inflation rate to come down below 8% in February.
While the index for the primary article group including the food items declined by 2.9% and 5.2% respectively, the fuel and manufacturing group indices rose significantly compared to January. The index for the fuel group rose by 0.7% and the manufacturing items group increased by 1.3% over the previous month.
Most of the items in the manufacturing group such as food, beverages, machinery, chemicals showed higher level of inflation except only the leather products.
The industry department which releases the data also revised the annual inflation rate for December to 9.41% from the provisional estimate of 8.43%.
Bond and swap yields rose after the data, while shares trimmed gains, reflecting expectations the data would prompt sharper and more numerous rate increases from the central bank than earlier expected.
Faced with persistently high inflation, the Reserve Bank of India (RBI) has been the most aggressive central bank in the region, lifting its key rates seven times since last March. Most analysts expect another rise of 25 basis points when the central bank reviews policy on Thursday.
“A 25-basis-points rate hike was anyway likely and this data reinforces our view for a rate hike not just in this week but through this year. So I think this number is going to worry the central bank a little bit,” said Ramya Suryanarayanan, a Singapore-based economist at DBS Bank.
Central banks across Asia are under pressure to act to stave off inflationary pressures as crude oil prices stay near a 2-1/2 year high on unrest in the Middle East. China, South Korea, Vietnam and Thailand have raised rates multiple times this year.
Several analysts have cited the risks to India’s economic growth and budget from inflation, especially as oil prices rise on unrest in the Middle East. Some of them have cut their forecasts for growth on these concerns.
RBI Governor Duvvuri Subbarao said last week the central bank was struggling to balance inflation and growth, and was caught between arguments to keep rates low and to lift them.
The government expects India’s GDP to grow 8.6 percent in the year to end-March, accelerating to around 9 percent in the next fiscal year.
“Inflation is not easing as quickly as policymakers had hoped... Risks are increasingly skewed towards more aggressive action,” RBC Capital Markets said.
After the data, finance minister Pranab Mukherjee reiterated the government’s hope inflation would ease to 7 percent by end-March, a forecast that many analysts view skeptically.
High inflation is a major headache for Prime Minister Manmohan Singh’s government, which faces an erosion of support as it nears key state elections next month. A poor showing could unravel the Congress party-led ruling coalition, which is already under attack for a series of corruption scandals.
“The high food prices, high raw material prices and the high wages which we had seen -- we are now beginning to see the second-round impact of those increases in the manufacturing sector,” said D.K. Joshi, principal economist at ratings agency CRISIL in Mumbai.
In a sign the latest readings could be an underestimation of underlying inflationary pressures, December’s initial inflation reading was upwardly revised by almost 1 percentage point to 9.41%.
Wholesale food inflation eased to 10.65% in February from 15.7% in January, while fuel inflation quickened to 11.49% from 11.41% in the previous month.
Food inflation has eased on better harvests, but analysts say headline inflation could quicken if the government and oil firms decide to raise fuel prices in response to high crude prices.
But political pressures make a fuel price hike unlikely before the end of the state polls in May.
Reuters also contributed to this story