Indian inflation data add to rate rise pressure

India’s headline inflation jumped to just under 9 per cent in March, defying promises by the nation’s policymakers that price pressures would be brought under greater control.

The highest inflation rate among any big economy is piling pressure on India’s central bank to raise lending rates more aggressively in coming weeks and trampling on optimistic government forecasts.

Persistent inflationary pressures are also fuelling a view that Asia’s third-largest economy has made a structural shift to higher prices, a move likely to be unpopular with India’s largely poor 1.2bn population.

Figures released on Friday showed that the wholesale price index had edged up to a year-on-year rate of 8.98 per cent last month compared with 8.31 per cent in February. The data overturned many forecasts by economists, who had expected inflation to come in at a more modest 8.4 per cent last month.

Stubbornly high inflation, now increasingly spurred by rising energy prices and strengthening demand, has thwarted the best efforts of the Congress party-led government to relieve price pressures on consumers.

The government had pledged to reduce inflation to below 7 per cent by the end of March. Many economists had viewed that target as overly optimistic and way beyond the comfort zone identified by the Reserve Bank of India.

Montek Singh Ahluwalia, the deputy chairman of the government planning commission, said on Friday that inflation had “not come under control” as much as the government would have liked.

“The underlying cause of inflation remains a cause of worry,” he said.

Rising food prices have for months been a big concern in India’s fast-growing economy. Economists and industrialists are increasingly expressing fears about more general price pressure and rising fuel prices.

“Inflation is proving difficult to tame and continued Reserve Bank of India tightening is needed, with the next [likely] rate hike coming at the May meeting,” said Leif Lybecker Eskesen, HSBC’s chief economist for India.

“With inflation numbers of this magnitude, especially core inflation, [the] RBI may feel compelled to be a bit more aggressive next time around and move by 50 basis points.”

In March, price pressure came from rising energy costs which surged 12.9 per cent year on year, compared with 11.5 per cent in February. But primary food inflation slowed to 9.5 per cent year on year in March from 10.6 per cent in February.

India’s fast-growing economy has wrestled with inflationary pressures throughout the global financial crisis and its aftermath. The Reserve Bank of India has raised interest rates eight times during the past year in an effort to cool rising prices while maintaining an economic growth rate of 9 per cent this year.

While some senior policymakers, including the prime minister’s economic advisory panel, insist that India needs to return quickly to targets of modest inflation – nearer 3.5 per cent – others appear more comfortable that the country can live with high inflation so long as it maintains high levels of growth.

The latest inflation figures shook the local financial markets. Sensex, the benchmark index on the Bombay Stock Exchange, fell 252 points to 19,445 points.