India Oct inflation likely picked up to 11-month high

BANGALORE Wed Nov 14, 2012 3:24am IST

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

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

Credit: Reuters/Rupak De Chowdhuri

Related Topics

BANGALORE (Reuters) - India's inflation probably accelerated to an 11-month high in October, likely adding to growing tensions between the government and the Reserve Bank of India (RBI) as the economy looks set for its slowest growth in a decade.

Dismal trade data on Monday and a surprise contraction in industrial production dashed hopes that the economy was regaining traction, and will likely heap more pressure on the government to boost growth by fast-tracking stalled reforms.

It is also likely to bolster calls from the government and business leaders for the central bank to cut interest rates.

But the RBI has so far rejected those calls, saying prices are still rising too fast to risk loosening policy.

A Reuters poll of 27 economists this week showed they expect wholesale prices rose an annual 7.96 percent in October, compared with 7.81 percent in September. Forecasts ranged from 7.40 percent to as high as 8.20 percent. The data is due around 0600 GMT on Wednesday.

A hike in government-regulated fuel prices and ensuing higher transportation prices also significantly raised food prices, the poll showed.

Most economists expect inflation to remain high before cooling off a bit early next year.

"The trajectory on inflation from here on is higher until December and then probably it will ease to 7.5 percent by March. That kind of a headline inflation will not give comfort to RBI to cut," said Yuvika Oberoi, an economist at Yes Bank.

Volatile fuel and food prices make up more than a third of the wholesale price index, India's main inflation gauge, which has stayed above 7 percent in each month since late 2009, well above the RBI's perceived comfort level of around 4-5 percent.

The government hiked prices of heavily subsidised diesel in mid-September in an attempt to cut its ballooning fiscal deficit and avoid losing its investment grade credit rating.

"The diesel price hikes may not have fully come through in the last month's inflation figure ... we were looking for fuel price inflation to add about 0.7 percentage points," said Vishnu Varathan, an economist at Mizuho Corporate Bank in Singapore.

RATE CUT PRESSURE

Finance Minister P. Chidambaram told Reuters earlier this month that growth this financial year could be as low as 5.5 percent, the slowest rate of expansion since 2002/03.

Investors, companies and the government have clamoured for a cut in interest rates to boost flagging activity but the RBI has held its repo rate at 8 percent, one of the highest in Asia, since April even as many other central banks cut rates.

At its meeting on October 30, the RBI cut its cash reserve ratio for banks which is expected to inject 175 billion rupees into the banking system.

But in an unusual move, Governor Duvvuri Subbarao gave fairly explicit policy guidance, saying the central bank might ease policy in January to March, the final quarter of the fiscal year, when it expects inflation to moderate somewhat.

But Yes Bank's Oberoi added that she does not see a respite in inflation going into next year when, according to a conservative estimate, it will average around 6-7 percent.

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

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.

Chidambaram'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.

(Polling by Shaloo Shrivastava; Editing by Ross Finley & Kim Coghill)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Coal Block Allocation

Coal Block Allocation

Government urges Supreme Court to not cancel some 'illegal' coal mines  Full Article 

Modi in Japan

Modi in Japan

Japan and India agree to boost strategic ties at summit  Full Article 

Basel III Norms

Basel III Norms

RBI amends Basel III guidelines for banks  Full Article 

HSBC PMI

HSBC PMI

Factory activity expands at slower clip in August.  Full Article 

Current Account

Current Account

Balance of payments surplus for third straight quarter  Full Article 

India Infrastructure

India Infrastructure

RBI rule handicaps India's infrastructure hopes  Full Article 

Book Talk

Book Talk

Reema Abbasi and a glimpse of Pakistan’s Hindu past  Full Article 

China Economy

China Economy

Retreat in China's PMIs heightens calls for policy easing.  Full Article 

Managing Share Sales

Managing Share Sales

Govt seeks bids from banks to manage PFC, REC share sales   Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage