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Global Economics

Inflation Picks Up in India

India's wholesale-price index is at a 10-year high, putting further pressure on the central bank to tighten monetary policy

By Kartik Goyal

(Bloomberg) — India's inflation accelerated to a ten-month high as food costs soared, making it more likely the central bank will tighten monetary policy soon to contain prices.

The benchmark wholesale-price index climbed 4.78 percent in November from a year earlier, following a 1.34 percent gain in October, the commerce ministry said in New Delhi today. That was more than the median forecast of a 4.2 percent increase in a Bloomberg News survey of 15 economists.

Bonds rose and India's benchmark stock index held gains on concern faster inflation may prompt the Reserve Bank of India to tighten monetary policy. Governor Duvvuri Subbarao last week said action may be needed to stabilize inflation expectations if food-price increases persist "a long time."

"The RBI is preparing the ground for rate hikes starting early next year," said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong. "Today's numbers should reinforce the case for such a move."

India's benchmark bonds pared gains. The yield on the 6.90 percent note due July 2019 rose to 7.56 percent as of 12:08 p.m. in Mumbai, from 7.53 percent before the report on prices, according to the central bank's trading system.

Inflation is accelerating across Asia as the region emerges from the worst global recession since the 1930s, prompting policy makers to start increasing borrowing costs. Consumer prices in Pakistan rose 10.51 percent in November from a year earlier and Sri Lanka's inflation quickened to a six-month high.

Weak Monsoon

India's inflation rate is also rising as the weakest monsoon since 1972 hurts farm output. The central bank forecasts inflation of 6.5 percent by March 31.

Potato prices more than doubled in November from the same month a year ago, sugar costs rose 53.76 percent, onion costs increased 32 percent and prices of pulses gained 35.2 percent, today's report showed. Manufactured price inflation accelerated to 3.99 percent in the month.

A report last week showed India's wholesale-food prices rose the most in 11 years in the last week of November, soaring 19.05 percent from a year earlier.

"Rising inflation is a matter of concern," particularly the rise in essential food commodities," Trade Minister Anand Sharma told reporters in New Delhi today. The government is monitoring the price situation,' he said.

Food Subsidies

To lower the impact of soaring food prices on India's 800 million people living on less than $2 dollars a day, Finance Minister Pranab Mukherjee last week sought parliament's approval to spend an extra 34.58 billion rupees ($741.7 million) to subsidize costs of some food items for the poor.

Policy makers in Australia and Vietnam have already begun raising interest rates to contain inflation. The Reserve Bank of Australia increased borrowing costs a total of 75 basis points at its last three meetings and Vietnam raised its benchmark rate by one percentage point to 8 percent in November.

Governor Subbarao started to withdraw India's monetary stimulus in October by ordering lenders to put a greater proportion of deposits in government bonds, even as he kept the reverse repurchase rate unchanged at 3.25 percent since April.

"Inflation is a much clearer and present risk in the near term," said Tushar Poddar, an economist at Goldman Sachs in Mumbai. "Given the long transmission lags in policy and excess liquidity feeding through to asset and general prices, we expect the Reserve Bank to start raising rates in January."

The central bank may increase its cash reserve ratio from 5 percent in its next monetary policy statement on Jan. 29, said Poddar said.

To contact the reporter on this story: Kartik Goyal in New Delhi at

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