India vows action, warns hoarders after May inflation spike

NEW DELHI Tue Jun 17, 2014 3:54pm IST

Labourers work in a paddy field at Gunowal village on the outskirts of Amritsar June 16, 2014. REUTERS/Munish Sharma/Files

Labourers work in a paddy field at Gunowal village on the outskirts of Amritsar June 16, 2014.

Credit: Reuters/Munish Sharma/Files

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NEW DELHI (Reuters) - India is committed to easing bottlenecks that have caused inflation to spike, Finance Minister Arun Jaitley said, blaming energy costs and "speculative hoarding" for a rise in wholesale prices that contributed to an investor selloff on Monday.

The rupee sank below 60 rupees to the dollar and government bonds had their biggest single-day fall in a month on Monday as higher-than-expected May inflation compounded worries about the impact of violence in Iraq on the price of oil, which India imports.

Indian Prime Minister Narendra Modi was elected amid widespread anger about rising prices and has made tackling inflation his top priority. Forecasts of weak monsoon rains that irrigate much of India's food production have added to inflation fears, with volatile vegetable prices rising by double digits.

"The rise in prices of food articles can also be attributed to withholding of stocks on account of apprehension of a weak monsoon," Jaitley said in a post on Facebook late on Monday.

"The State Government(s) should take effective steps to ensure that speculative hoarding is discouraged," he said.

The rupee sank to 60.23 rupees a dollar, its lowest level since May 6, and benchmark 10-year bond yields closed up 5 basis points at 8.65 percent after the government issued May wholesale inflation data on Monday. The annual pace was 6.01 percent, compared with 5.2 percent in April.

"The government is watching the movement of rupee closely," Jaitley said. "The slight instability of rupee is essentially because of Iraq oil shocks and global fear of oil price rise."

Jaitley is due to deliver his first budget in July and must balance a commitment to fiscal discipline with the government's aim of rapidly reviving economic growth.

The government "is committed to take measures which will positively impact the GDP and result in higher growth than expected. I am hopeful that the inflation which is moving upwards now would eventually come down," he said.

At the weekend, Modi warned that "bitter medicine" was needed to put India's economy back on track, without giving details.

(Reporting by Frank Jack Daniel; Editing by Richard Borsuk)

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