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Indian Inflation Exceeding Estimates Adds Rate-Rise Pressure

Bloomberg, Nov 14, 2013

Indian inflation accelerated more than economists estimated in October, adding pressure on central bank Governor Raghuram Rajan to raise interest rates again.

The wholesale-price index advanced 7 percent from a year earlier, compared with a 6.46 percent climb in September, the Commerce Ministry said in New Delhi today. The median of 40 estimates in a Bloomberg News survey was 6.95 percent.

Weakness in the rupee and bottlenecks in the supply of everything from food to energy have fanned the cost of living in India even as economic growth moderates. DBS Bank Ltd. and Crisil Ltd. are among forecasters predicting Rajan will raise the benchmark interest rate a quarter of a percentage point to 8 percent by the end of March next year.

“Inflation has begun to inch up and it is difficult to imagine the central bank taking its eyes off it,” said Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai. She also expects the Reserve Bank of India to boost the policy rate by a quarter point by March.

The rupee pared gains and bonds dropped after the report.

The currency, which has weakened about 13 percent against the dollar in the last 12 months, advanced 0.2 percent to 63.19 as of 1 p.m. in Mumbai. The yield on the 10-year government bond maturing in May 2023 rose to 8.96 percent from 8.92 percent yesterday. The S&P BSE Sensex index of shares increased 1.4 percent, aided by earnings reports.

Weak Economy

Rajan has raised the repurchase rate twice, by a quarter point each time, since taking over at the RBI at the start of September. The former International Monetary Fund chief economist has pledged to bring down inflation, which exceeds 10 percent based on a separate gauge of consumer prices.

Both the weak economy and price pressures are a concern, Rajan said at a briefing yesterday, adding the RBI will examine the impact of food and fuel costs and rupee depreciation “before we make further decisions on interest rates.”

The rupee has strengthened about 9 percent from a record low on Aug. 28. Rajan announced concessional swaps for banks when he became governor to attract dollar inflows and bolster India’s currency, whose weakness stokes import costs.

Food prices climbed 18.2 percent in October from a year earlier, today’s report showed. Fuel and power increased 10.3 percent. August inflation was revised to 6.99 percent from 6.10 percent.

Non-food manufactured goods prices, a measure of core inflation, rose 2.58 percent after a 2.06 percent gain in September, Bloomberg calculations based on the data showed.

Companies including carmaker Ford India Ltd. have raised prices as input costs rise. Ford boosted them as much as 5 percent in September.

Inflation has sapped consumer spending in the nation of 1.2 billion people, where more than 800 million live on less than $2 per day, making living costs a key issue for the general election due by May.

The RBI predicts 5 percent economic growth in the year ending March 2014, less than the average of about 8 percent in the past decade.