Indian inflation rises as food prices jump

India’s inflation accelerated in May on the back of a double digit rise in food and energy prices, making it harder for the country’s central bank to justify a widely expected interest rate cut next week.

The wholesale prices index rose 7.55 per cent annually in May, up from 7.23 per cent in April, as food and fuel prices rose 10.74 per cent and 11.53 per cent respectively last month, according to Indian government data released Thursday.

Economists said that the increase in food prices highlighted the dilemma that the Reserve Bank of India currently faces: If it cuts rates to boost growth it risks pushing up inflation; but if it leaves rates unchanged it could further depress the economy.

Despite the high inflation data most analysts said the central bank had no other option but cut rates by at least 25 basis points next week to boost investor sentiment after growth slumped to a nine-year low of 5.3 per cent in the first three months of 2012.

“Headline inflation is certainly not encouraging and remains a serious concern for the central bank,” said A Prasanna, an economist at ICICI Securities. But he still expected the RBI board to cut rates by 25 basis points next week because “they need to send a clear message to investors that they are also concerned about slowing growth”.

Analysts also said that a rate cut was partially justified by the fact that core inflation – which excludes food and fuel prices – was around 5 per cent, significantly lower compared with a year ago.

But with the price of staples such as vegetables and pulses up 49 per cent and 17 per cent respectively, there will be growing pressure on the ruling Congress-led government to address India’s deficient infrastructure, which is considered by many economists to be the prime cause of high food inflation.

Pranab Mukherjee, India’s finance minister, said on Tuesday that the government needed to “address the supply-side concerns”, but failed to give any details on what might actually be done.

Standard & Poor’s, the credit agency, this week threatened to downgrade India’s sovereign debt rating to below investment grade as it criticised the government’s policy paralysis and deteriorating economic conditions.

India’s benchmark 10-year bond yield increased 3 basis points to 8.28 per cent after the figures were released while the rupee weakened against the dollar to 55.75 compared with 55.70 earlier in the day
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