India Inflation Rises, Crimping Scope for Interest-Rate Cut

India’s (INGDPY) inflation accelerated for the first time in five months in February, weakening the case for an interest-rate cut to counter slower economic growth.

The benchmark wholesale-price index rose 6.95 percent from a year earlier, after climbing 6.55 percent in January, the commerce ministry said in a statement in New Delhi today. The median of 25 estimates in a Bloomberg News survey was for a 6.7 percent gain.

The Reserve Bank of India announces its rate decision tomorrow as a 17 percent climb in crude oil prices this year threatens to stoke inflation. The central bank has signaled a reduction in borrowing costs depends on a sustained moderation in inflation and steps to pare the fiscal deficit, with Finance Minister Pranab Mukherjee due to present the budget on March 16.

“This pretty much firmly removes any lingering expectation of a rate cut tomorrow,” said Rajeev Malik, a senior economist at CLSA Asia Pacific Markets in Singapore. “For the remainder of the year, while the RBI might cut in April, markets’ expectations of an aggressive easing over the course of the year will be disappointing.”

The rupee was little changed at 49.945 per dollar as of 12:51 p.m. local time. It has rebounded more than 6 percent in 2012 after sliding 16 percent last year, the worst performance in Asia. The BSE India Sensitive Index climbed 0.3 percent. The yield on the 8.79 percent note due November 2021 fell 2 basis points, or 0.02 percentage point, to 8.3 percent.

The surge in Brent crude, the benchmark for almost all of India’s imports, risks increasing costs for companies in Asia’s third-largest economy, which imports three-quarters of its oil.

Cash Squeeze

Governor Duvvuri Subbarao raised the repurchase rate by a record 3.75 percentage points from March 2010 to October last year, to 8.5 percent, in an attempt to restrain inflation. The rate increases led to a cash squeeze, prompting the central bank to unexpectedly cut the amount of deposits lenders need to set aside as reserves in January and March.

Costlier credit and the impact of Europe’s debt crisis on exports have sapped expansion. Gross domestic product rose 6.1 percent last quarter from a year earlier, the slowest pace in more than two years.

The Reserve Bank said in January that inflationary threats, such as the fiscal deficit and energy prices, made it “premature” to start reducing borrowing costs.

While a slowdown in the global economy has hurt exports, domestic consumption is allowing some companies to increase the prices of their goods.

Tata Motors, the country’s biggest automaker by value, raised car prices by as much as 12,000 rupees on Feb. 8. Indian Railways raised the minimum charge customers pay to move cement, coal, chemical manure, potash, iron and steel by as much as 20 percent this month.

Indian officials are under pressure to revive growth even as inflationary threats linger. President Pratibha Devisingh Patil told parliament this week the government remains confident it will soon raise economic expansion to 8 percent to 9 percent.

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.

To contact the editor responsible for this story: Shamim Adam at sadam2@bloomberg.net

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