Inflation quickens in June, adds to government woes

NEW DELHI Mon Jul 15, 2013 2:58pm IST

A vendor waits for customers at his stall at a wholesale food market in Mumbai July 15, 2013. REUTERS/Danish Siddiqui

A vendor waits for customers at his stall at a wholesale food market in Mumbai July 15, 2013.

Credit: Reuters/Danish Siddiqui

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NEW DELHI (Reuters) - India's headline inflation picked up for the first time in five months in June, driven by higher food prices, adding to the economic challenges facing Prime Minister Manmohan Singh's government and reducing the odds of an early national election.

Monday's data comes on the heels of a surprise contraction in industrial output, a fall in exports and higher retail inflation, suggesting that a firm recovery from the worst downturn in a decade is still far-off.

A global sell-off has made the rupee currency the worst-performing emerging Asian currency so far this year. It hit an all-time low of 61.21 per dollar last week and is down more than 8 percent against the dollar so far this year.

The currency's relentless fall since mid-May has almost dashed hopes for an interest rate cut at the Reserve Bank of India's (RBI) policy review on July 30 as it has revived inflationary pressures.

Headline inflation, measured by the wholesale price index (WPI), quickened to 4.86 percent in June, data released by the Ministry of Commerce and Industry showed.

The reading was in line with the 4.90 percent pace estimated by analysts in a Reuters poll, compared with 4.70 percent in May.

Non-food manufacturing inflation, which the central bank monitors to gauge demand-driven price pressures, slowed further to 2.1 percent in June from 2.4 percent a month ago. April's WPI reading was revised down to 4.77 percent from 4.89 percent.

"Elections in the backdrop of bad economic data will only present a bad picture of the government," said D.H. Pai Panandiker, president at RPG Foundation, a private think-tank in New Delhi.

"They would rather like the economy to revive little bit before elections are called. So, I don't see the possibility of elections before May 2014."

Graphic: WPI, rates, Industrial output link.reuters.com/deq95s

Financial markets cheered the WPI data as it kept alive some hopes of an interest rate cut on grounds that it was still within the central bank's perceived comfort level of 5 percent.

The 10-year bond yield fell 3 basis points to 7.58 percent from levels before the announcement.

Swap rates eased, with the one-year swap rate down 3 basis points to 7.58 percent. The five-year swap rate fell 3 basis points to 7.57 percent.

But Shubhada Rao, chief economist at Yes Bank, said the data is unlikely to force an interest rate cut on July 30.

"There is a strong evidence that the impact of weak rupee is not yet reflected on manufactured prices because of weak pricing power," she said after the inflation data.

The RBI left interest rates unchanged last month, after cutting them at each of its previous three policy reviews, citing upside inflationary risks from the rupee's slide.

In a major worry for Prime Minister Singh, food inflation accelerated for the second month in row to 9.74 percent in June as vegetable and onion prices shot up over 20 percent from the previous month.

Higher food prices pushed up retail inflation, to 9.87 percent in June, snapping a three-month easing trend, government data on Friday showed.

Inflation has been a major factor in the declining popularity of the Congress party-led government. However, a sharp moderation in price-pressures in recent months had given the beleaguered government some hope ahead a string of state elections this year and a national election due by May 2014.

(Additional reporting Reporting by Mumbai treasury and market teams; Editing by Sanjeev Miglani)

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