Indian inflation at 7-year high

By Kartik Goyal  |   2008-6-14  |     NEWSPAPER EDITION

INIDA'S inflation accelerated to a seven-year high on soaring commodities and energy prices, stoking speculation that the central bank will increase interest rates next month.

Wholesale prices jumped 8.75 percent in the week to May 31, after gaining 8.24 percent in the previous week, the government said in New Delhi yesterday. Economists surveyed by Bloomberg News predicted an 8.28-percent increase.

The Reserve Bank of India raised the benchmark rate to 8 percent this week, joining central banks in Brazil, China and Russia in increasing borrowing costs to combat inflation even as economic growth slows.

Jet Airways (India) Ltd, the nation's largest domestic carrier, and JSW Steel Ltd said near-record oil prices and other costs are hurting profits.

"Our profit margins have narrowed by as much as 10 percent in the past three months due to the relentless rise in input costs," said Sajjan Jindal, vice chairman and managing director of JSW Steel, India's third-biggest producer of the metal. "Inflation is the biggest danger to the economy."

India's central bank on June 4 raised its repurchase rate to a six-year high of 8 percent from 7.75 percent, after twice increasing its cash reserve ratio in April to contain inflation.

Bonds fell as faster inflation spurred speculation the central bank will raise borrowing costs next month for a second time this year. The yield on the benchmark 8.24-percent note has increased 14 basis points this week. Governor Yaga Venugopal Reddy and his colleagues are due to meet on July 29.

"We expect the Reserve Bank to raise the repurchase rate by a further 25 basis points in the next policy meeting," said Tushar Poddar, an economist at Goldman Sachs Group Inc in Mumbai. "We also expect a further 50-basis-points increase in the cash reserve ratio in the remaining of 2008."

Surging food costs and a doubling in the price of oil in a year limit the ability of the central bankers to cushion growth, the Organization for Economic Cooperation and Development said, predicting the strongest worldwide inflation this year since 2001.

India's inflation in the last week of May was the fastest since February 2001. Price gains in neighboring Pakistan accelerated to 19.3 percent in May, the highest in 30 years. Inflation in Vietnam was 25.2 percent in the same month, the fastest since 1992, and in Indonesia consumer prices jumped 10.4 percent from a year ago.

Central banks in Indonesia, the Philippines, Vietnam and Pakistan have increased borrowing costs to tackle inflation. China raised its cash reserve requirements for lenders for the fifth time this year to 17.5 percent.