India Inflation Accelerates, Increasing Rate Pressure

India’s inflation accelerated in June, increasing pressure on the central bank to raise interest rates for a second time this month.

The benchmark wholesale-price index jumped 10.55 percent from a year earlier, after a 10.16 percent gain in May, the commerce ministry said in a statement in New Delhi today. The inflation reading for April was raised to 11.23 percent, a 19-month high, according to the statement.

Reserve Bank of India Governor Duvvuri Subbarao is facing Asia’s fastest pace of inflation, which he says is a tax on the poor in a nation where almost three-quarters of the people live on less than $2 a day. Prime Minister Manmohan Singh’s top economic advisers yesterday signaled Subbarao may have to act at the bank’s July 27 policy meeting.

“Today’s data shows they still have more work to do,” Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong, said in e-mailed comments. “Indian inflation has been bouncing around 10 to 11 percent for five months now and there is a real risk that this will impact inflation expectations.”

The yield on the benchmark 10-year government bond rose one basis point to 7.63 percent at the 5:30 p.m. close in Mumbai. The Bombay Stock Exchange’s Sensitive Index fell 0.3 percent and the rupee gained 0.2 percent to 46.69 against the dollar.

Asia’s Fastest

Consumer prices paid by industrial and farm workers in India are increasing at almost 14 percent, the most among 17 countries tracked by Bloomberg in the Asia Pacific, including China and South Korea, on growing consumer demand and as a drought last year reduced farm production.

If inflation persists at more than 10 percent, “some action” by the Reserve Bank is required, Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said in New Delhi yesterday.

Montek Singh Ahluwalia, deputy chairman of the Planning Commission, said the central bank should make “whatever adjustments it feels necessary” as inflation above 10 percent is “not acceptable.”

Subbarao, in an unscheduled decision on July 2, boosted the central bank’s benchmark reverse repurchase and the repurchase rates by a quarter-point for a third time since mid-March. The reverse repurchase rate is 4 percent the repurchase rate is 5.5 percent.

Political Pressure

Prime Minister Singh’s government is facing criticism from the opposition for failing to check prices. On July 5, the political parties organized a nationwide strike to highlight the issue. Flights were canceled, companies shut offices and taxis stayed off the roads in major Indian cities that day.

Inflation may accelerate after Singh on June 25 allowed state-run refiners including Indian Oil Corp. to raise prices of gasoline and diesel in a bid to cut fuel subsidies and narrow the budget deficit from a 16-year high.

The fuel-price increase will add about a percentage point to the wholesale-price inflation rate, the Reserve Bank estimates.

The Gujarat Cooperative Milk Marketing Federation, a dairy products maker, raised milk prices by as much as 2 rupees (4.3 cents) a liter in New Delhi last week.

“We were left with no choice but to hike prices as transportation costs have jumped,” R.S. Sodhi, chairman of Gujarat Cooperative, said in a telephone interview yesterday from Anand in the western state of Gujarat.

Singh’s government is relying on lower food prices this year to cool inflation. The meteorological department forecasts the June-September monsoon rains, the main source of irrigation in India, will be sufficient for farming.

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