India’s Inflation Accelerates, Adding to Rate-Rise Pressure

India’s inflation accelerated to the highest level in more than a year, maintaining pressure for further interest-rate increases even as economic growth slows.

The benchmark wholesale-price index rose 9.78 percent in August from a year earlier after a 9.22 percent jump in July, the commerce ministry said in a statement in New Delhi today. The median of 25 estimates in a Bloomberg News survey was for a 9.64 percent gain.

The Reserve Bank of India will probably raise rates by a quarter of a percentage point at the Sept. 16 policy meeting, according to 11 of 12 economists in another Bloomberg survey. Governor Duvvuri Subbarao has to weigh the risks to expansion from Europe’s debt crisis and a faltering U.S. recovery against price pressures, which may be stoked by a weaker rupee.

“It is a bad enough number that the RBI cannot switch off just yet,” said Rajeev Malik, a senior economist at CLSA Asia Pacific Markets in Singapore. “The global backdrop is an important opposing force but the domestic inflation numbers don’t leave much room. So, some action has to happen.”

The Indian rupee dropped 0.4 percent to 47.79 at 12:33 p.m. in Mumbai. The Bombay Stock Exchange Sensitive Index slid 0.1 percent. The yield on the 7.8 percent bond due April 2021 fell one basis point, or 0.01 percentage point, to 8.32 percent.

Worst Performer

The currency has weakened 6.5 percent against the dollar this quarter, the worst performer in Asia, threatening higher import costs.

Indian Oil Corp., the country’s biggest refiner, will take a decision on increasing gasoline prices tomorrow, Finance Director P.K. Goyal said in an interview with Bloomberg UTV today. Losses from selling fuels below cost are increasing following the rupee’s decline against the dollar, Goyal said.

The fall in the rupee could be a “short-term disruption,” R. Gopalan, secretary, Department of Economic Affairs in the finance ministry, said in New Delhi today.

Inflation in India is the highest among the so-called BRICS nations. Policy makers have raised borrowing costs by a total of 325 basis points since mid-March 2010, the fastest round of increases since the Reserve Bank was established in 1935, Bloomberg data show. The central bank’s repurchase rate is 8 percent.

BRICS Inflation

Consumer prices rose 7.2 percent in Brazil, 8.2 percent in Russia and 6.2 percent in China last month from a year earlier. In South Africa, they climbed 5.3 percent in July.

Inflation is a political issue in India as it erodes spending power in a nation where the World Bank estimates more than three-quarters of the population live on less than $2 a day.

India may boost borrowing costs further to tame inflation, the Asian Development Bank said today as it cut the nation’s growth forecast for the current financal year.

India’s economy may expand 7.9 percent in the year ending March 31, lower than the 8.2 percent growth estimated in April, the ADB said in a report.

India’s industrial production growth slowed to 3.3 percent in July, the weakest pace in almost two years, signaling consumer demand is waning in Asia’s third-largest economy.

Sales at carmakers including Maruti Suzuki India Ltd. fell for the second straight month in August from a year earlier. India’s steel demand this fiscal year will probably grow at half the pace forecast in May as soaring rates damp purchases of cars and homes and stall public works projects, according to G.K. Basak, executive secretary of the steel ministry’s joint plant committee.

Still, “given the RBI’s commitment to battle persistent high inflation, there will be further monetary tightening in the remaining months of FY2011 until there is credible evidence of inflation trending to the RBI’s target range,” the ADB said.

In his last policy decision on July 26, Subbarao raised the central bank’s repurchase rate by half a percentage point and predicted inflation by the end of March will be 7 percent, a percentage point higher than his previous guidance.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE