Indian Inflation Unexpectedly Quickens Before Rajan Review

Indian inflation unexpectedly accelerated to a six-month high in August as the rupee’s slide stoked import costs, adding pressure on central bank Governor Raghuram Rajan to sustain efforts to support the currency.

The wholesale-price index rose 6.1 percent from a year earlier, compared with July’s 5.79 percent climb, the Commerce Ministry said in New Delhi today. The median estimate of 25 analysts in a Bloomberg News survey was for a 5.7 percent gain.

Rajan unveils his first monetary-policy decision this week after becoming governor on Sept. 4 and inheriting interest-rate increases from July aimed at aiding the currency. He’s pledged to contain inflation expectations and stepped up efforts to boost foreign-exchange reserves, prompting a climb in the rupee that’s pared its drop versus the dollar in 2013 to 12.5 percent.

“Monetary tightening can’t be reversed until we start seeing a consistent decline in inflationary pressures,” said Rupa Rege Nitsure, an economist at Bank of Baroda in Mumbai. “India has entered a stagflationary phase.”

The rupee, up 4.6 percent this month, pared gains after the release and ended the day 1 percent higher at 62.845 per dollar in Mumbai. The S&P BSE Sensex stock index rose 0.1 percent. The yield on the 7.16 percent bond due May 2023 fell to 8.43 percent from 8.49 percent on Sept. 13.

Dollar Weakens

The dollar weakened against major peers as former Treasury Secretary Lawrence Summers withdrew his bid to become U.S. Federal Reserve chairman. Summers would have tightened policy more than Janet Yellen, who is among the front-runners to replace Ben S. Bernanke, a Bloomberg Global Poll showed.

India’s current-account gap and slowing economic growth left it vulnerable to the capital flight from emerging markets triggered by the prospect of reduced U.S. monetary stimulus.

Prime Minister Manmohan Singh’s economic advisory body last week said the nation’s monetary stance must continue until the rupee stabilizes. Policy easing is possible subsequently if wholesale inflation moderates, it said.

Every 10 percent decline in the rupee adds as much as 80 basis points to wholesale inflation, according to Nomura Holdings Inc.

Food prices climbed 18.2 percent in August from a year earlier, with onion costs surging 245 percent, today’s report showed. Fuel and power jumped 11.3 percent. Non-food manufactured goods prices, a measure of core inflation, advanced 1.97 percent after a 2.33 percent gain in July, according to Bloomberg calculations based on the data.

Interest Rates

The RBI raised two interest rates in July to increase shorter term borrowing costs and capped cash injections into the banking system, seeking to curb the supply of rupees.

The benchmark repurchase rate was left unchanged after cuts earlier in 2013. Rajan will keep it at 7.25 percent at the Sept. 20 review, Standard Chartered Plc and Morgan Stanley said.

The governor on Sept. 4 announced a plan to provide concessional swaps for banks’ foreign-currency deposits, a move that will boost foreign reserves by $10 billion, according to Bank of America Merrill Lynch.

Rajan delayed the September review to follow the Fed’s meeting. The U.S. monetary authority will probably trim its monthly bond-buying program by $10 billion to $75 billion this week, a separate survey of economists showed.

Singh is striving to revive investment, tame price pressures and woo fund inflows before elections due by May. Slower expansion imperils the nation’s fight against poverty.

A separate gauge of inflation based on consumer prices rose 9.52 percent last month from a year earlier.

The government has raised taxes on gold imports and eased curbs on investment from abroad to bolster Asia’s No. 3 economy. It predicts the current-account gap will narrow to about $70 billion in the fiscal year ending March 2014 from a record $87.8 billion in the previous 12-month period.

Banks from HSBC Holdings Plc to Goldman Sachs Group Inc. have lowered their growth projections for India following the RBI’s moves in July. Both expect 4 percent expansion in 2013-2014. The average in the past decade is about 8 percent.

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