India’s Inflation Exceeds Estimates as Rate Decision Looms

Reserve Bank of India Governor Duvvuri Subbarao
Duvvuri Subbarao, governor of the Reserve Bank of India (RBI). Photographer: Adeel Halim/Bloomberg

Indian inflation quickened more than estimated in May as food and fuel prices surged, an acceleration that may fail to prevent an interest-rate cut next week to shore up slowing growth.

The benchmark wholesale-price index rose 7.55 percent from a year earlier, after climbing 7.23 percent in April, the commerce ministry said in New Delhi today. The median of 37 estimates in a Bloomberg News survey was 7.5 percent. A separate report showed a decline in Indian exports and imports last month.

Indian economic expansion weakened to a near-decade low last quarter, hurt by faltering efforts to open up the economy, a moderation in investment and the impact of Europe’s debt crisis on overseas sales. The slowdown has added pressure on the Reserve Bank of India to reduce borrowing costs at its June 18 policy meeting, even as the nation struggles with the fastest inflation among the biggest emerging markets.

“The growth slowdown and core inflation below 5 percent are giving the central bank room to cut rates,” said Meghna Patel, a fixed-income analyst at Emkay Global Financial Services Ltd. in Mumbai. “But it’s not a monetary policy battle alone, the government has to do its bit on faster reforms to prop up the economy.”

Non-food manufactured goods inflation, a representation of core inflation, was 4.86 percent in May compared with 4.77 percent in April, according to data compiled by Bloomberg. Vegetable prices rose 49.4 percent from a year earlier, while fuel and power costs climbed 11.5 percent, today’s report showed.

Rupee, Stocks

The rupee, which has slumped about 20 percent against the dollar in the past year, declined 0.2 percent to 55.815 per dollar at the local time close. The BSE India Sensitive Index dropped 1.2 percent. The yield on the 8.79 percent bond due November 2021 rose four basis points, or 0.04 percentage point, to 8.33 percent from 8.29 percent yesterday.

Central bank Governor Duvvuri Subbarao will lower the benchmark repurchase rate by a quarter of a percentage point to 7.75 percent, the second reduction this year, according to 17 of 23 economists surveyed by Bloomberg News. Two expect a half-point move to 7.5 percent, with the rest predicting no change.

While the rupee’s decline, India’s fiscal deficit and food prices are among risks to inflation, the Reserve Bank “will tilt toward supporting growth,” said Amol Agrawal, a Mumbai-based economist at STCI Primary Dealer Ltd.

Exports, Imports Fall

Officials are being pressed into action to shore up a global economy that is suffering its steepest slowdown since the recession ended in 2009. Australia cut its benchmark rate on June 5, with China unveiling a reduction two days later.

Indian exports fell 4.16 percent to $25.68 billion in May from a year earlier, Director General for Foreign Trade Anup Pujari said at a briefing in New Delhi today, giving provisional data. Imports shrank 7.36 percent to $41.9 billion, leaving a trade deficit of $16.3 billion, he said.

Lower export demand is “showing up in the industrial slowdown” in the South Asian nation, said Anubhuti Sahay, a Mumbai-based economist at Standard Chartered Plc. The government’s target of 20 percent export growth in the 12 months that began April 1 “looks optimistic given the global economic situation,” Sahay said.

India’s economic slowdown and an oil-price drop suggest more room for another rate cut even as inflation risks remain, Deputy Governor Subir Gokarn said June 1. The monetary authority lowered borrowing costs to 8 percent from 8.5 percent on April 17. It has also cut the amount lenders must set aside as reserves twice in 2012 to ease a cash squeeze in the economy.

Slower Growth

Gross domestic product rose 5.3 percent in the three months through March from a year earlier, the slowest pace since 2003.

Growth in Asia’s third-largest economy has moderated in part after Subbarao raised rates by a record 3.75 percentage points from mid-March 2010 to October last year to try and contain inflation, which exceeded 9 percent for most of 2011.

“People say that the Reserve Bank’s monetary tightening did not reduce inflation, it only ended up stifling growth,” Subbarao said in a speech in the southern city of Hyderabad today. “Very strong critics, who don’t like me, have a sharper version of this. They say, you couldn’t kill inflation but ended up killing growth. I only want to say that you cannot control inflation without sacrificing some growth.”

While the structural nature of India’s current-account deficit is worrying, a repeat of the balance-of-payments crisis the nation suffered in 1991 is unlikely, he also said.

India’s pace of price increases remains the fastest in the BRIC group of largest emerging economies, which also includes Brazil, Russia and China. The South Asian nation may become the first BRIC country to lose its investment-grade credit rating, Standard & Poor’s said June 11.

Some companies have felt the impact of price pressures and cooling expansion. Car sales fell in May at Maruti Suzuki India Ltd., and the Indian units of Ford Motor Co. and General Motors Co., after an increase in gasoline prices.

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