India Inflation Reaching Seven-Month High Adds Rate Pressure

Indian inflation unexpectedly accelerated to a seven-month high in September, adding to the case for a further increase in the benchmark interest rate.

The wholesale-price index rose 6.46 percent from a year earlier, compared with a 6.1 percent advance in August, the Commerce Ministry said in New Delhi today. The median of 33 estimates in a Bloomberg News survey was for a 6 percent climb.

Governor Raghuram Rajan, who took over at the Reserve Bank of India last month, raised the repurchase rate to 7.5 percent after vowing to tame inflation, which was almost 10 percent in September based on a separate gauge of consumer prices released today. The cost of living is jumping even as economic growth slows, stoked by food prices and weakness in the rupee that makes imports more expensive.

“This inflation reading further strengthens the case for a hike in the repurchase rate,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. The RBI is likely to raise the benchmark another 50 basis points by the end of this year.

The rupee, which has lost about 14 percent against the dollar in the past 12 months, weakened 0.8 percent to 61.545 at the close in Mumbai. The S&P BSE Sensex index rose 0.4 percent. The yield on the 10-year government bond maturing in May 2023 climbed to 8.58 percent from 8.49 percent on Oct. 11.

Interest Rate

The central bank will increase the repo rate by a quarter of a percentage point to 7.75 percent in the policy review due Oct. 29, Royal Bank of Scotland Group Plc said today. Rajan will also further relax liquidity curbs imposed in July to support the rupee after the currency stabilized, it said.

The rupee has climbed about 13 percent since reaching a record low on Aug. 28 after Rajan offered concessional swaps for banks’ foreign-currency deposits and borrowings to encourage them to raise dollars.

Industrial-output growth slowed more than economists estimated in August as consumer spending moderated, a report showed last week. That adds pressure on Prime Minister Manmohan Singh’s government to intensify efforts to revive the economy.

Singh’s steps, ranging from fewer restrictions on foreign investors to faster approvals for road and power projects, have so far failed to stem the slowdown in growth. He’s also pledged to curb the budget deficit to tackle inflation risks from government spending.

Growth Nadir

The expansion in Asia’s third-largest economy is “somewhere near the low,” Rajan, a former International Monetary Fund chief economist, said in a speech in Washington on Oct. 10. The pace should accelerate, helped by exports and farm output, he said.

Food prices climbed 18.4 percent in September from a year earlier, with onion costs surging 323 percent, today’s report showed. Fuel and power prices rose more than 10 percent.

Rupee weakness makes imports such as crude oil more costly. State-owned Indian Oil Corp. raised petrol prices about 7 percent in September in New Delhi compared with the previous month.

Consumer prices rose 9.84 percent in September from a year earlier, compared with 9.52 percent in August, a government report showed today. That’s the second highest in the Group of 20 major economies, according to data compiled by Bloomberg.

The economy will expand 5 percent to 5.5 percent in the fiscal year ending March, the Finance Ministry forecasts. HSBC Holdings Plc predicts slower growth of 4 percent in that period, which would be the weakest in more than a decade.

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