India’s inflation reaches double digits

India’s headline inflation has hit double digits, raising the possibility that the Reserve Bank of India will raise rates before a scheduled monetary policy review meeting next month.

Revised figures released yesterday showed that the wholesale price index had risen 11 per cent in March year-on-year, overturning earlier relief that the economy had restrained inflation in single digits. In May the WPI rose 10.2 per cent, double what the government considers its “comfort level”.

The stubbornly high inflation was above most analysts’ expectations and threatens to spell trouble for Manmohan Singh, the prime minister. Last month he acknowledged the pain that high prices were inflicting on the country’s 1.2bn people and promised to ease inflation to 5-6 per cent by the end of the year.

The Hindu nationalist opposition Bharatiya Janata party has criticised the Congress party-led government for pursuing a high-growth strategy at the cost of India’s most vulnerable, who are particularly sensitive to price rises.

Some analysts, including Stephen Roach, chairman of Morgan Stanley Asia, have warned India is in danger of overstimulating its economy in the aftermath of the global financial crisis.

Yesterday’s figures showed that price pressures remain strong, with rapid growth of 8.6 per cent in the past quarter. The inflationary pressure was registered among primary products, such as sugar cane, tea, metals, textiles and wood.

Rohini Malkani, an economist at Citigroup in Mumbai, said the high inflation reflected the importance of changes in India’s economy, such as rising incomes, changing dietary patterns and low agricultural yields. Non-food manufactured goods inflation showed the force of demand in a fast-growing, yet constrained, domestic economy.

India, in recent months, has been the most aggressive tightener of monetary policy among the G20 leading nations, after Australia. More interest rate rises are on the way, but the RBI has said it is prepared for “baby steps” rather than more dramatic action. Some analysts predict the repo rate will rise 100 basis points from the current rate of 5.25 per cent in December.

Resistance to sudden rate rises by Pranab Mukherjee, the finance minister, and strong lobbying by India’s business groups, however, have left only a few of the more hawkish economists believing another rate rise is imminent.

“The RBI must take action to cool demand now, otherwise it will run the risk of having to tighten more aggressively later,” said Frederic Neumann, co-head of Asian economic research at HSBC. “A 25 basis point hike in repo rates before the next quarterly review meeting in July is still on the cards.”

Last night, business groups urged the RBI not to choke off liquidity at a time when foreign portfolio investment had slowed.

Amit Mitra, secretary-general of the Federation of Indian Chambers of Commerce and Industry, said inflation would fall in coming months. “The primary sector is where the maximum pressure is coming from. It is the lean season [before the monsoon] as far as agricultural supplies are concerned. Once the new season begins . . . we can expect inflation in primary articles to come down.”