India-Inflation 04-04

Indian inflation rises to 3-year high, spurring interest rate hike speculation

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NEW DELHI (AP) — India’s key inflation rate has surged to a 3-year high, the government said Friday, raising the possibility of the central bank raising interest rates soon despite signs of a slowing economy.

The wholesale price index-based inflation rate accelerated to 7 percent on year in the week that ended March 22 from 6.68 percent a week earlier, according to data released by the Ministry of Commerce and Industry.

For the fifth straight week, the inflation rate breached the Reserve Bank of India’s stated comfort level of 5 percent for the financial year that ended Monday.


"These are ugly numbers. I think the Reserve Bank of India will do a combination of Market Stabilization Scheme bond issuance and a 50-basis point cash reserve ratio hike," said Shubhada Rao, chief economist at Yes Bank.

Manufactured products gained 0.2 percent in the week that ended March 22, pushed up by a 9 percent on-week rise in sunflower oil and a 4 percent rise each in gingerly oil and hydrogenated oil.

The index for minerals group jumped 38.2 percent on week, pulled up by a 46 percent increase in iron ore and a 57 percent rise in steel ingot prices, the government data said.

The central bank already has raised the repurchase, or overnight lending, rate by 150 basis points since January 2006 to the current 7.75 percent. It also has raised the amount that banks have to set aside as cash reserves with the central bank to 7.50 percent of deposits to curb liquidity.

The tightening has contributed to a deceleration in India’s economic growth to 8.4 percent on year in the third quarter of the last fiscal year, from 8.9 percent in July-September quarter and an 18-year high of 9.6 percent in the fiscal year that ended on March 31.

Worries about a soft patch in the world’s second-fastest growing major economy were reinforced after industrial production in January rose just by 5.3 percent on year, compared with 11.6 percent a year earlier and 7.7 percent on year in December.

"High inflation is a global supply-side phenomenon, rather than economic overheating," said K.V. Kamath, chief executive officer of ICICI Bank, the largest local private bank by assets. "I am sure the policy makers — monetary as well as fiscal — know that we need to work in terms of easing supply constraints."

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