December 15, 2009 / 2:33 AM / 10 years ago

RPT-UPDATE 2-Rising Indian inflation adds to case for tightening

(Repeats story issued late on Monday)

* Food prices up 16.7 pct y/y in November

* Factory goods prices up 4 pct y/y as economy picks up

* Finance secretary: no cause for emergency action

* Analysts: cbank may start tightening monetary stance soon (Adds details, analysts’ views)

By Manoj Kumar

NEW DELHI, Dec 14 (Reuters) - India’s wholesale prices rose faster than expected in November, and analysts said inflation worries could prompt the central bank to tighten banks’ reserve requirements in coming weeks and raise rates early next year.

Manufactured goods prices rose 4 percent from a year earlier, a sign that inflation pressures were spreading from food prices to the broader economy, and that could prompt the Reserve Bank of India (RBI) to raise the cash reserve ratio (CRR) before year-end.

The wholesale price index rose an annual 4.78 percent in November, higher than a Reuters poll of 4.14 percent and October’s 1.34 percent rise, as food prices surged after the worst monsoon rains since 1972 and then flooding hurt crops.

“With demand picking up, we expect firms to have a greater ability to pass through higher costs,” Nomura economist Sonal Varma said.

“Therefore, supply-side inflation may easily translate into demand-side inflation, if inflation expectations are not anchored,” she said, adding she expected an interest rate rise in January and a CRR increase before that.

Wholesale prices have already risen 7.5 percent from the beginning of the 2009/10 financial year that started in April, and analysts have predicted inflation could climb to 8 percent by the end of the fiscal year.

However, Finance Secretary Ashok Chawla said inflation was still below the central bank’s forecast of 6.5 percent for the end of the fiscal year next March.

“So it is not as if we are taken by surprise or there is any cause for any special emergency action at this stage,” he added.

The central bank, which slashed banks’ reserve requirements and cut its key lending rate by 425 basis points during the worst of the global crisis, began scaling back stimulus at its October policy review by removing some liquidity support measures.

It left rates steady at October’s review. The next review is in late January, but it can adjust monetary policy at any time.

The benchmark 10-year bond yield IN069019G=CC rose to the day’s high of 7.59 percent after the data from 7.55 percent, but later unwound most of the rise.

The 30-share BSE index .BSESN ended down 0.1 percent at 17,097.55 points after having up about 0.83 percent beforehand.

MANUFACTURING PRICES

While rising inflation has been mainly driven by a surge in food prices — they were up an annual 16.71 percent in November — the index for manufacturing products, which accounts for almost two-thirds of WPI basket, rose 3.99 percent in November from previous month’s annual rise of 1.36 percent.

Industrial output grew 10.3 percent in October from a year earlier, on robust consumer demand and government stimulus spending, and annual economic growth of 7.9 percent in the September quarter was the fastest in 18 months. [ID:nDEL358319]

“(The rise in manufacturing inflation) is clear evidence of inflation climbing up in November on the back of not just primary articles but also manufactured products,” said Shubhada Rao, chief economist of YES Bank.

“Firming inflation will be on RBI’s radar and we maintain our earlier call of a CRR hike in December,” she said.

Food prices are politically sensitive in India and even though monetary policy can do little to influence them, Reserve Bank of India officials have flagged concern that rising food costs could fan inflationary expectations. [ID:nBMA006594]

“Comments last week from (RBI) Governor Subbarao about the potential impact of food prices on inflationary expectations provide a clear signal that the RBI is preparing the ground for rate hikes starting early next year, and today’s numbers should reinforce the case for such a move,” said Brian Jackson, an economist at Royal Bank of Canada in Hong Kong.

Jackson expects rates to rise 75 basis points in the first quarter of next year. (Editing by John Mair/Ruth Pitchford)

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