India's inflation eases at 8.66% in April, but rate rise seen in June

Tuesday, 17 May 2011 00:00 -     - {{hitsCtrl.values.hits}}

NEW DELHI: India’s headline inflation eased in April on lower manufacturing prices but the prospect of rising energy costs will keep pressure on the central bank to raise rates in June.

The wholesale price index , the country’s main inflation gauge, rose an annual 8.66 percent in April, above the median forecast of 8.48 percent rise in a Reuters poll and lower than an upwardly revised annual rise of 9.04 percent in March.

The softening may prove to be a blip as the government aims to raise state-controlled prices of fuels such as diesel and cooking gas, possibly as soon as this week, according to sources.

State-run oil refiners had raised petrol prices by about 8.6 percent, or 5 rupees a litre ($0.11), from Sunday, a record hike that will fuel inflation in Asia’s third-largest economy.

Fresh from victories in s ome state elections the Congress-led ruling coalition does not face polls until early next year, giving it a window for raising fuel prices.

But the move may not go well with populist government allies, including the Trinamool Congress, its most powerful partner that won the state election in West Bengal last week .

Supporters of the main opposition Bharatiya Janata Party blocked roads and rail tracks in protests against the hike, demonst r ations that may intensify as the government closes in on a decision on diesel prices.

Most economists expect the central bank to raise its benchmark lending and borrowing rates by 25 basis points each at its policy review on June 16, which would its 10th increase since mid-March 2010.

The Reserve Bank of India , which has been one of the world’s most aggressive central banks in tightening policy, earlier this month raised rates by a hefty 50 basis points as headline inflation remained well above its comfort level of 5-6 percent.

“Sticky inflation points to the need for more rate hikes and we expect two more increases this year. The data is modestly negative for Indian assets, including INR (the rupee), bonds and equities,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

The food price index, which contributes just over 14 percent in the wholesale price index, rose 8.71 percent and the fuel price index climbed 13.32 percent in April, data released by Ministry of Commerce and Industry showed.

The most-traded 7.80 percent 2021 bond yield rose 2 basis points to 8.26 percent after the data. The main share index extended losses to 0.85 percent.

The manufacturing sector, which contributes around 64 percent to WPI, witnessed 6.18 percent inflation in April, compared with 6.21 percent in the previous month.

The central bank has warned that the wholesale inflation would remain around March levels in the first half of the fiscal year that began in April, before easing.

India is not alone in facing up to the reality that gross domestic product growth is likely to be dented in the battle against inflationary pressures that have been building in Asia as the region leads the global recovery.

All the major economies in Asia have tightened monetary policy to contain price pressures that have built up during a strong recovery from the global crisis.

China has raised banks’ reserve requirements for the fifth time this year to restrain prices, as the consumer price inflation at 5.3 percent in April, remained above expectations.

Economists say normal rainfall in the June-September Indian monsoon season could boost farm output and rural incomes, spur domestic demand and encourage companies to pass on higher input and borrowing costs, potentially mounting inflation pressure.