Indian inflation stays above 10%

Inflation remained stubbornly high in India last month, piling pressure on the central bank to curb rising prices with a second July rate rise when it meets in two weeks.

Wholesale prices had risen 10.55 per cent in June from a year earlier, data released on Wednesday showed, propelled by rising incomes, low agricultural yields and the fast growing domestic economy. Prices rose 10.16 per cent in May.

Manmohan Singh, prime minister, last month publicly 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.

Most economists expect the Reserve Bank of India to raise the benchmark rate by 25 basis points at its policy review on July 27. At the meeting, the RBI will have to take into account a recent fuel price hike and a slump in industrial output growth in May.

The bank raised rates in an unscheduled action this month by a quarter point, its third hike so far this year.

“Indian inflation has been bouncing around 10 to 11 per cent for five months now, and there is a real risk that this will impact inflation expectations and make it even more difficult to get price pressures under control,” said Brian Jackson, senior strategist at the Royal Bank of Canada.

He described rising prices as “an increasingly difficult political issue” for the Congress party-led government, as it pushes for 9 per cent economic growth.

The Bharatiya Janata party, the Hindu nationalist opposition, has criticised the government for pursuing a high-growth strategy at the cost of India’s most vulnerable, who are particularly sensitive to price rises. This month, the opposition staged a protest in central Delhi against high prices.

Some analysts have warned that India is in danger of over-stimulating its economy in the aftermath of the global financial crisis. They are also becoming concerned that the bank’s actions and messages are increasingly inconsistent.

One analyst said the central bank, which is not fully autonomous, appeared to have so many mandates, it was unclear whether it was prioritising fighting inflation as India recovers from the global economic downturn.

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. The RBI has said it will take “baby steps” rather than more dramatic action.

Some analysts predict the repo rate, the rate at which the central bank lends to commercial banks, will rise another 75 basis points from the current rate of 5.50 per cent by year-end.