India Inflation Quickens, Curbing Room for Cutting Rates

Indian inflation unexpectedly accelerated in April, crimping the central bank’s scope to bolster economic growth by extending interest-rate cuts. Stocks fell, reversing earlier gains.

The benchmark wholesale-price index rose 7.23 percent from a year earlier, after climbing 6.89 percent in March, the Ministry of Commerce and Industry said in a statement in New Delhi today. The median of 32 estimates in a Bloomberg News survey was for a 6.67 percent gain.

Reserve Bank of India Governor Duvvuri Subbarao signaled last month that inflation might limit the room for further cuts after he slashed the benchmark rate by half a percentage point, flagging price risks from the fiscal deficit, energy costs and a weaker rupee. Greece’s political turmoil and a deepening debt crisis in Europe are increasing pressure on Asian nations to support growth as exports falter from Taiwan to Malaysia. China cut banks’ reserve requirements on May 12 to revive demand.

“The Reserve Bank of India faces somewhat of a dilemma,” Robert Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse Group AG, said in a note after the report. “Our guess is that the chance of a June rate move has diminished.”

Sensex Falls

The BSE India Sensitive Index fell 0.5 percent in Mumbai, after rising as much as 0.6 percent earlier in the day. The five-day decline is the longest losing streak this year.

The yield on the 8.79 percent note due November 2021 rose two basis points immediately after the inflation data, It ended five basis points, or 0.05 percentage point, lower at 8.52 percent on speculation the central bank will step up debt purchases through open-market operations and add cash to the banking system.

The Reserve Bank lowered the repurchase rate on April 17 for the first time since 2009, by 50 basis points to 8 percent. A report last week showed Indian industrial production unexpectedly contracted in March as weaker domestic demand and tumbling exports hurt the economy.

“The inflation numbers are a very uncomfortable statistic,” Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said in New Delhi today. “Many people have been calling for an easing in monetary policy but it makes it difficult for RBI to moderate policy. It is not a good sign.”

Worst Performer

Concern India’s outlook has worsened because of trade and fiscal deficits, political gridlock, elevated inflation and faltering global growth has pushed the nation’s currency toward a record low. That prompted the central bank to say last week exporters must convert half their foreign-currency earnings into rupees as it stepped up efforts to check the decline.

The currency weakened 0.6 percent to 53.9575 per dollar in Mumbai. It is down about 17 percent in the past year, the worst performer in a basket of 11 most-traded Asian currencies tracked by Bloomberg.

Governor Subbarao’s 13 interest-rate increases in the last two years helped tame price pressures in a nation where 75 percent of the people live on less than $2 a day. The wholesale-price inflation gauge has fallen below 9 percent in 2012, after breaching that level most of last year.

Aside from cutting the benchmark rate, the central bank has also reduced the amount of deposits lenders must set aside as reserves twice this year by a combined 125 basis points, to 4.75 percent, to ease cash shortages in the banking system.

Fastest Inflation

Credit Suisse predicts India will cut its repurchase rate by another 125 basis points by March 2013, Prior-Wandesforde said today.

Still, the central bank’s scope to cut interest rates further to boost growth is constrained by the threat of price increases, Ashima Goyal, a member of the bank’s technical advisory committee, said in an interview in Mumbai last week.

While the wholesale price gauge has cooled after the Reserve Bank raised rates by a record 3.75 percentage points from mid-March 2010 to October last year, India still has the highest inflation in the so-called BRIC group of biggest emerging markets that also includes Brazil, Russia and China.

“The inflation number underscores that the room to ease monetary policy is quite limited because there are still upside risks to inflation,” said Leif Eskesen, Singapore-based chief economist for India and Southeast Asia at HSBC Holdings Plc. “There isn’t a lot of spare capacity in the economy because growth has slowed on the back of policy paralysis, lack of structural reforms and therefore it makes inflation a structural problem rather than a cyclical one.”

Maruti Profits

Maruti Suzuki India Ltd., the nation’s biggest carmaker, posted a 3 percent decline in fourth-quarter profit because of high raw material costs and discounts on some models.

The country imports 80 percent of its annual crude requirements and the government compensates state oil firms for selling products below market prices.

Asia’s third-largest economy probably expanded 6.9 percent in the 12 months through March 2012, the least in three years, government estimates show. Standard & Poor’s cut India’s credit outlook to negative from stable last month, putting at risk its investment grade status.

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