Inflation probably hit 11-month high in October

NEW DELHI Mon Nov 12, 2012 9:33am IST

A vendor carries a basket of bananas to sell at a market in Kolkata October 15, 2012. REUTERS/Rupak De Chowdhuri/Files

A vendor carries a basket of bananas to sell at a market in Kolkata October 15, 2012.

Credit: Reuters/Rupak De Chowdhuri/Files

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NEW DELHI (Reuters) - India's headline inflation likely accelerated to an 11-month high in October on costlier fuel and food, a headache for the government in a battle with the central bank over spending and high interest rates ahead of state elections.

Wholesale prices - India's main inflation gauge - rose an annual 7.96 percent, according to a Reuters poll of economists, faster than the 7.81 percent reported in September.

Headline inflation has averaged close to 9 percent since January 2011.

The government will release the data at around 12 p.m. on Wednesday.

With the economy on track to post its slowest growth in a decade, the government is pressing the central bank to join efforts to revive activity ahead of a general election due in just over a year and several state polls before that. Election-related spending could put additional upward pressure on prices next year.

But the Reserve Bank of India (RBI) has thus far rebuffed those calls, saying prices are still rising too fast to risk loosening policy much. The bank says rising rural wages, a result of government policies, are stoking inflation.

The next monetary policy review is due in December. The central bank has said any interest rate cut is "highly improbable" at that meeting, since it expects price pressures to remain elevated following a hike in the price of heavily subsidised diesel in September.

The fuel is widely used by trucks ferrying commodities around the country. A 14 percent increase in the price -- the first in 15 months -- was expected to add 110 basis points to overall inflation between September and December, the RBI said.

The government was forced to tackle diesel prices after Standard & Poor's and Fitch warned that the burgeoning fiscal deficit put India's investment grade credit rating under threat.

Last month, the government announced additional steps including spending cuts, a move perceived to be an olive branch to the RBI.

RURAL ECONOMY

The central bank has in the past criticised the government's expansive fiscal policy, which it said undermined the battle against inflation and lowered growth prospects. It had set out fiscal consolidation as a pre-condition to lower interest rates.

Finance Minister P. Chidambaram's argues that monetary policy has limitations in an emerging economy such as India that needs to borrow to fund investment and social development. He says policymakers must learn to live with some inflation.

The government is trying hard to get the economy back on track to bolster its re-election bid in 2014. An economic revival would help him generate resources to fund his big-ticket welfare programmes meant for its core constituency comprising poor and rural voters and mitigate anger at rising prices.

Some of those welfare measures such as frequent revisions in farm support prices and a rural employment guarantee scheme have turned India into a higher cost economy.

Farm support prices for rice has nearly doubled in the last five years. During the same period, government spending on the rural employment guarantee scheme has nearly tripled, pushing up wages and farm costs.

Rising rural income is underpinning the pricing power of manufacturers. Data shows firms are still able to pass on more than 50 percent of their cost increases, resulting in sticky core inflation.

A steady increase in rural household income has also increased the demand for protein food items, which is keeping food inflation high.

The RBI expects inflation to start moderating in the January-March quarter and ease to 7.5 percent in March -- still way above its perceived comfort level of between 4-5 percent. (Reporting by Rajesh Kumar Singh; Editing by Frank Jack Daniel & Kim Coghill)

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