India inflation climbs higher

Posted on May 14, 2012

Inflation in India has picked up again, delivering a blow to the hopes of Indian business leaders’ that the country’s central bank would further cut interest rates.

The wholesale prices index rose 7.23 per cent year on year in April, compared with 6.89 in March, mainly due to higher food prices and rising manufacturing costs, in the latest worrying sign that India’s economy is running out of steam.

    The higher than forecast rise in inflation risks short-circuiting the Reserve Bank of India’s aggressive effort last month to stimulate waning growth with its first interest rate cut in three years, economists said.

    Rajeev Malik, economist at CLSA in Singapore, said that the data “should result in soul-searching” at the central bank for having cut interest rates more than needed.

    The RBI cut the repo rate, the rate at which the central bank lends to commercial banks, by 50 basis points last month to 8 per cent – more than expected by most economists.

    The cut was applauded by industrialists who had previously criticised the central bank for choking investment and growth with its tight monetary policy which had seen rates increase in an effort to control inflation.

    Most economists said that the likelihood of another rate cut had been seriously reduced following Monday’s negative data.

    “The headline [inflation] data are worrisome,” said A Prasanna, economist at ICICI Securities in Mumbai. “The rise in inflation will surprise the central bank as much as the man on the street.

    “I think we are unlikely to see another rate cut for the next five to six months … focus will return to fighting inflation rather than boosting growth.”

    Growth rose 6.1 per cent in the last quarter of last year – the slowest rate of increase in three years – compared with more than 8 per cent a year earlier.

    India has also suffered a sharper drop in exports since the beginning of the year, as demand in developed markets has dropped sharply.

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