India Inflation at 8.75%; Fastest Pace in Seven Years (Update4)
By Kartik Goyal
June 13 (Bloomberg) -- India's inflation accelerated to a seven-year high on soaring commodities and energy prices, stoking speculation the central bank will increase interest rates next month.
Wholesale prices jumped 8.75 percent in the week to May 31, after gaining 8.24 percent in the previous week, the government said in a statement in New Delhi today. Economists surveyed by Bloomberg News predicted an 8.28 percent increase.
The Reserve Bank of India raised the benchmark rate to 8 percent this week, joining central banks in Brazil, China and Russia in increasing borrowing costs to combat inflation even as economic growth slows. Jet Airways (India) Ltd., the nation's largest domestic carrier, and JSW Steel Ltd. said near-record oil prices and other costs are hurting profits.
``Our profit margins have narrowed by as much as 10 percent in the past three months due to the relentless rise in input costs,'' said Sajjan Jindal, vice chairman and managing director of JSW Steel, India's third-biggest producer of the metal. ``Inflation is the biggest danger to the economy.''
India's central bank on June 4 raised its repurchase rate to a six-year high of 8 percent from 7.75 percent, after twice increasing its cash reserve ratio in April to contain inflation.
Bonds fell as faster inflation spurred speculation the central bank will raise borrowing costs next month for a second time this year. The yield on the benchmark 8.24 percent note has increased 14 basis points this week. Governor Yaga Venugopal Reddy and his colleagues are due to meet on July 29.
Repurchase Rate
``We expect the Reserve Bank to raise the repurchase rate by a further 25 basis points in the next policy meeting,'' said Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai. ``We also expect a further 50 basis points increase in the cash reserve ratio in the remaining of 2008.''
Surging food costs and a doubling in the price of oil in a year limit the ability of the central bankers to cushion growth, the Organization for Economic Cooperation and Development said in its June 4 report, predicting the strongest worldwide inflation this year since 2001.
India's inflation in the last week of May was the fastest since February 2001. Price gains in neighboring Pakistan accelerated to 19.3 percent in May, the highest in 30 years. Inflation in Vietnam was 25.2 percent in the same month, the fastest since 1992, and in Indonesia consumer prices jumped 10.4 percent from a year ago.
Indonesia, Vietnam
Central banks in Indonesia, the Philippines, Vietnam and Pakistan have increased borrowing costs over the last two months to tackle inflation. China, where retail sales grew in May at close to the fastest pace in nine years, raised its cash reserve requirements for lenders for the fifth time this year to 17.5 percent from June 25.
India's inflation is likely to accelerate to more than 9 percent next week, the highest in 13 years, after the government raised retail fuel prices on June 4, according to economist Sonal Varma at Lehman Brothers Holdings Inc. The changes in fuel prices will be reflected in price data due on June 20.
Crude oil prices touched an all-time high of more than $139.12 a barrel on June 6, raising concern India's import costs will jump. The South Asian nation relies on crude oil from overseas to meet three-quarters of its energy needs.
``Higher oil prices look set to weaken growth by squeezing profit margins, widening the trade deficit and reducing consumer purchasing power,'' Varma of Lehman said. ``The rate hike increases the downside risk to growth because it will raise the cost of borrowing for companies and households.''
Slower Growth
India's industrial production, which accounts for a quarter of the $912 billion economy, increased 7 percent in the month of April, slower than the 11.3 percent gain in the same month a year ago, the government said yesterday. The economy is likely to grow by 8.5 percent this year, the slowest pace in four years.
Concern that faster inflation and higher borrowing costs will slow growth, hurting profits, have led to a 25 percent decline in the Bombay Stock Exchange's Sensitive Index, or Sensex, this year. The stocks gauge was 0.4 percent or 56.4 points down at 15,193.76 at 2:31 p.m.
Higher cost of funds may force lenders like State Bank of India, the nation's largest lender, and ICICI Bank Ltd., to raise loan rates for houses and automobiles, hurting consumer demand. State Bank is scheduled to decide on lending rates today.
Record crude oil prices prompted Indian refiners to raise local jet-fuel costs by 53 percent this year, threatening profits at Jet Airways and its local rivals. SpiceJet Ltd., India's second-largest discount airline, yesterday said it will cut more routes as a surge in jet-fuel prices hurt profit.
Edible Oils
Inflation in India may accelerate further as the government may revise today's preliminary wholesale-price estimate in two months after receiving additional data. The commerce ministry today raised its inflation estimate for the week ended April 5 to 7.71 percent from 7.14 percent.
To contain inflation, Prime Minister Manmohan Singh has cut import duties on edible oils, fuels and other food items and banned the export of pulses, wheat, rice and cement. Inflation is likely to ease in six to eight weeks time, according to the government.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.
Last Updated: June 13, 2008 06:54 EDT |
