Indian inflation races to seven-year high

India’s inflation rate hit its highest level in seven years at the end of May, prompting speculation that the central bank would be forced to increase interest rates for the second time in a matter of weeks to contain soaring prices.
In a surprise increase, inflation jumped to an annual rate of 8.75 per cent on May 31, up from 8.24 per cent a week earlier, with economists warning it was likely to breach 10 per cent in figures to be released next week that will reflect fuel price rises at the start of June.

“Headline inflation is about to reach double digit levels,” Morgan Stanley economist Chetan Ahya said. “The RBI will likely hike the policy rate again.”
Central banks across Asia are facing off against inflation as a surge in the price of oil beyond $130 is driving up the cost of basic goods in a region that imports most of its fuel.
India’s United Progressive Alliance, the ruling coalition led by the Congress party, has taken a series of administrative measures to contain prices, ranging from curbing exports of essential commodities to suspending futures trading in key food items.

But the moves have proven largely futile in quelling inflation. Friday’s surprise increase was partly the result of a rise in the cost of some edible oils, an item whose price the government had earlier sought to control through import duty cuts and the suspension of futures trading.
Another contributor to Friday’s sharper-than-expected increase in inflation was the textile sector, an industry that is heavily dependent on petrochemicals as a raw material.
With the central government measures faltering, the RBI was forced to take emergency action, announcing after market hours on Wednesday an emergency increase in its key “repo” lending rate by 25 basis points to 8 per cent, its highest level in more than five years.
Economists now expect the RBI to increase rates by a further 25 basis points on July 29, its next scheduled policy meeting, in an effort to send a strong signal on inflation and to support the rupee, which has depreciated 8 per cent against the dollar this year.
Economists say India’s policymakers are now making a priority of controlling inflation even at the expense of growth – the economy expanded 9 per cent in the fiscal year that ended in March.
But with inflation emerging as the number one political issue ahead of a general election that must be held by May next year, that is a price India’s government is happy to pay.
India’s hundreds of millions of poor voters are highly sensitive to even minor increases in the cost of living.
Sonal Varma, an economist with Lehman Brothers, said the inflation figures for the week ended June 7, to be released next Friday, would probably reflect a government increase in India’s retail fuel prices of an average of 10 per cent as well as potentially an increase in aircraft fuel prices.
It is also likely to be driven higher by the base effect of a year earlier, when inflation dipped during the same period.
“Everything seems to be bunched up in a week where you will already have fuel prices and will already be coming off a negative base. That’s the reason why we are looking at a step increase up to 10 per cent next week,” Ms Varma said.

Source: FT.com