New Delhi: India’s inflation held above the central bank’s target for a third straight month, raising concerns that commercial lenders may be ordered to increase reserves for the third time this year.
Wholesale prices rose 7.82% in the week ended on 10 May from a year earlier, after gaining 7.83% in the previous week, the government said in a statement here on Friday.
India’s current inflation rate is “totally unacceptable” and the central bank is ready to respond “swiftly and appropriately,” Reserve Bank of India (RBI) governor Y.V. Reddy said on 20 May. Liquidity management will be the focus of efforts to contain demand pressures, he said after raising the reserve requirement for lenders, called cash reserve ratio or CRR, twice last month.
“Inflation may hit double digits in the next few months if the oil prices and other commodity prices remain at current levels,” said Robert Prior-Wandesforde, a senior economist at HSBC Holdings Plc. “The pressure will intensify to raise the cash reserve ratio and repurchase rate.”
Inflation may accelerate further as the government is likely to revise Friday’s preliminary wholesale-price estimate in two months after receiving additional data. The commerce ministry raised its inflation estimate for the week ended on 15 March to 8.02%, the highest since September 2004, from the early figure of 6.68%.
The RBI is targeting inflation at 5.5% for the year that started on 1 April. Economists had expected Friday’s report to show a 7.8% increase in prices in the week to 10 May.
Inflation in Asian nations including India and China is accelerating due to rising consumer demand and record commodity and energy prices, said N.R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. Consumer prices in China rose 10.3% in April from a year earlier, the fastest pace since at least 1999.
Crude oil prices have doubled from a year ago and touched an all-time high of more than $135 a barrel on 22 May, raising concern India’s import costs will rise. Bonds fall declined for an eighth day on Friday on concern that rising oil prices will spur inflation. The yield on the 8.24% note due April 2018 this week rose 12 basis points, or 0.12 percentage point, to 8.05% at close. The benchmark Sensex index of the Bombay Stock Exchange fell 1.57% to 16,649.
The index of fuel products, with 14% weight in the inflation basket, rose 7.39% in the week ended on 10 May from a year earlier. Prices of aviation turbine fuel rose 10%. The manufactured price inflation rose 7.73%.
Inflation in India is underestimated as it doesn’t reflect the complete pass-through of increases in petrol and diesel prices, governor Reddy said on 20 May. India, which subsidises petrol and fuel sold through state-owned retailers, raised the fuel prices for the first time in 20 months in February.
The government has persuaded cement and steel producers to cut prices to help fight inflation. Over the past two months, it scrapped import duties on edible oils, steel products and banned the export of cement, pulses, rice, wheat and edible oil to contain prices.
The steps will help moderate inflation in eight to 10 weeks, Prime Minister Manmohan Singh said on Thursday.
The RBI on its part last month twice raised CRR, to 8.25%, the highest since March 2001, from 7.5%.
The central bank may increase the cash reserve ratio by a further 50 basis points and raise its repurchase rate by 25 basis points before the end of the year, HSBC’s Prior-Wandesforde said.