Indian inflation accelerated to a 10-month high in September after an increase in diesel prices, limiting room for an interest-rate cut to revive the economy.
The wholesale-price index rose 7.81 percent from a year earlier, after climbing 7.55 percent in August, the Commerce Ministry said in a statement in New Delhi today. The median of 35 estimates in a Bloomberg News survey was 7.7 percent.
India’s central bank has refrained from joining countries such as Brazil and South Korea in extending rate cuts, saying inflation exceeds a comfort zone of about 5 percent. At the same time, the nation’s finance officials are seeking lower borrowing costs to back an economic-policy revamp that included a rise in subsidized diesel tariffs last month to pare a fiscal deficit.
“Increasing diesel prices was a necessary step to control the budget deficit and, therefore, curb inflation in the medium to long term,” said Suvodeep Rakshit, an economist at Kotak Securities Ltd. in Mumbai. “It will cause a rise in inflation in the short term and the Reserve Bank will wait until inflation comes down into its comfort zone.”
The policy overhaul since Sept. 13, which snapped months of political gridlock over how to boost the economy, also included measures to open industries such as retailing to more foreign investment, helping the rupee to rebound from a record low.
The currency, which has strengthened 2.4 percent in the past month, slid 0.4 percent to 53.015 per dollar at the close in Mumbai. The BSE India Sensitive Index of stocks rose 0.2 percent, while the yield on the 10-year bonds due June 2022 was little changed at 8.17 percent.
Reserve Bank of India Governor Duvvuri Subbarao announces his next rate decision on Oct. 30. He has said the outlook for the budget shortfall will help to shape monetary policy.
Subbarao left the repurchase rate unchanged at 8 percent for a third meeting last month, while reducing banks’ reserve ratios to bolster lending. The central bank cut borrowing costs in April from 8.5 percent for the first time since 2009.
Inflation may slow to within the Reserve Bank’s comfort level by March next year as the rupee rises and the fiscal shortfall shrinks, Economic Affairs Secretary Arvind Mayaram said in an interview yesterday. Finance Minister Palaniappan Chidambaram said on Oct. 12 that he plans reform measures for capital markets, insurance, banking and infrastructure.
Fuel prices advanced 11.9 percent in September from a year earlier, today’s report showed. Non-food manufactured goods prices, a measure of core inflation, rose 5.57 percent compared with 5.58 percent in August, calculations by Bloomberg showed.
India faces the fastest inflation and the widest budget gap among major emerging markets. Economic growth may weaken to a decade-low of 4.9 percent in 2012 after investment stalled, the International Monetary Fund said last week.
Higher freight and raw material costs prompted Hyundai Motor India Ltd. to announce proposed price increases this month.
While the room for rate cuts is limited, the central bank may continue to ease liquidity, said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi.