Oct. 29 (Bloomberg) -- India’s wholesale prices increased the most since May, highlighting the inflation risks that prompted the central bank this week to begin withdrawing record monetary stimulus.

The benchmark wholesale-price index rose 1.51 percent in the week to Oct. 17 from a year earlier, after gaining 1.21 percent in the previous week, the Commerce Ministry said in New Delhi today. That was less than the 1.59 percent median forecast in a Bloomberg News survey of 19 economists.

Governor Duvvuri Subbarao last night called inflation a “regressive tax” on the poor, a day after the Reserve Bank of India ordered lenders to set aside more cash in government bonds. Norway’s Norges Bank yesterday joined Australia’s central bank in raising borrowing costs this month as policy makers around the world prepare to combat rising prices and asset bubbles.

A “recovery in growth” and faster inflation will force India to also raise its benchmark interest rates starting January, said Chetan Ahya, an economist at Morgan Stanley in Singapore. “We see this increase in policy rates as a move toward normalization rather than tightening that hurts growth.”

The yield on the 6.9 percent note due July 2019 was held at 7.23 percent as of 11:41 a.m. in Mumbai, from before the report, according to the central bank’s trading system.

Subbarao this week increased the statutory liquidity ratio to 25 percent from 24 percent and raised the central bank’s inflation forecast for the year through March to 6.5 percent from 5 percent.

‘Calibrated Way’

The Reserve Bank kept its benchmark interest rates unchanged, even as Subbarao said the central bank would need to exit its accommodative policy settings in a “calibrated way” to ensure “that while the recovery process is not hampered, inflation expectations remain anchored.”

The central bank will “keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively through policy adjustments to stabilize inflation expectations,” Subbarao said in his Oct. 27 statement.

Indian stocks declined for a fourth day on concern that corporate profits may suffer as policy makers withdraw stimulus. The Bombay Stock Exchange’s Sensitive Index, or Sensex, fell 1.1 percent to 16,102.08.

Wholesale prices in India have risen for seven straight weeks after declining for three months. Consumer price inflation is running above 10 percent.

Potatoes, Onions

Consumer prices paid by farm workers jumped 13.19 percent in September from a year earlier and those paid by industrial workers climbed 11.72 percent in August. Food prices are rising as the weakest monsoon rains since 1972 hurt farm output, causing shortages.

Potato prices increased 97.7 percent and onion prices climbed 45 percent in the week to Oct. 17 from a year earlier, today’s report showed. Costs of lentils rose 22.9 percent, sugar gained 45.7 percent and milk increased 10 percent. Costs of gasoline, edible oils and metals declined.

India uses wholesale price data as its key inflation gauge as its consumer price indexes are calculated on the basis of costs to particular segments of the nation’s workers and don’t capture the aggregate price picture.

The threat of faster inflation is prompting other central banks to start winding back monetary stimulus initiated to protect their economies from the worst global recession since the 1930s.

Australia, Norway

The Norges Bank yesterday cited higher-than-expected inflation in pushing Norway’s benchmark rate up a quarter point to 1.5 percent and signaling steeper increases than it previously forecast.

The Reserve Bank of Australia on Oct. 6 became the first Group of 20 nation to raise interest rates since the start of the global financial crisis more than a year ago, increasing its overnight cash rate target to 3.25 percent from 3 percent.

South Korea’s central bank Governor Lee Seong Tae on Oct. 23 said keeping borrowing costs at a record low may not be healthy, after gross domestic product grew in the third quarter at the fastest pace in seven years.

India’s wholesale-price index published today may be revised in two months, after the government receives additional data. The ministry revised the rate for the week ended Aug. 22 to a rise of 0.17 percent from a decline of 0.21 percent.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

Last Updated: October 29, 2009 03:26 EDT