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  • Inflation is exploding in one of the world’s largest economies

    Inflation is exploding in one of the world’s largest economies


    Thursday, July 14, 2011
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    From Bloomberg:

    India’s inflation accelerated to 9.44 percent in June, adding pressure on the central bank to extend its longest stretch of interest-rate increases in a decade. Bonds pared gains.

    The benchmark wholesale-price index rose 9.06 percent in May from a year earlier, according to the commerce ministry. The median estimate of 28 economists in a Bloomberg News survey was for a 9.68 percent increase. Food-price inflation quickened to a three-week high of 8.31 percent in the week ended July 2, the ministry said in a separate statement today.

    The Reserve Bank of India may raise rates this month even after Mumbai was hit yesterday by the biggest terrorist attack since November 2008, economists said. India has persisted with monetary tightening, while neighbors from Malaysia to Indonesia refrained from raising rates in July on concern that Europe’s debt crisis and slowing U.S. growth will hurt Asian economies.

    “The central bank’s stance will be governed by inflation,” Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., said before the report. “These attacks are unlikely to have any material impact on the economy.”

    She predicted the central bank will increase its repurchase rate by a quarter of a percentage point to 7.75 percent in the next policy announcement on July 26. The Reserve Bank has raised borrowing costs 10 times since the start of 2010.
    Yields Rise

    The yield on the 7.80 percent note due in April 2021 was at 8.28 percent as of 1:36 p.m., compared with 8.26 percent before the report was published. The Bombay Stock Exchange’s Sensitive Index rose 0.7 percent and the rupee was little changed at 44.52 against the dollar.

    Three bomb blasts in Mumbai yesterday killed at least 17 people and injured 131 others, according to a statement from the home ministry. Yesterday’s attack is the first in the nation’s financial capital since Pakistani gunmen killed about 160 people in 2008.

    Inflation accelerated in June because of an increase in diesel costs and higher prices of minerals and manufactured products, Finance Minister Pranab Mukherjee said in a statement today. He said the government is working with the central bank to take “appropriate” steps to cool prices to a “comfortable level.”
    Fuel Price

    Prime Minister Manmohan Singh’s government on June 24 allowed state-run refiners including Indian Oil Corp. to increase diesel prices by 3 rupees (7 cents) a liter, kerosene by 2 rupees a liter and cooking gas by 50 rupees for every 14.2 kilogram bottle. The decision was aimed at reducing subsidies and helping limit losses at companies selling fuels below cost.

    “The fuel price hike is yet to seep into the economy,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai. “Inflation will remain in double digits until November as its impact plays out.”

    He expects the Reserve Bank to increase borrowing costs by a quarter point this month.

    By contrast, Federal Reserve Chairman Ben S. Bernanke yesterday signaled the central bank has more tools for monetary easing should the U.S. economy weaken.

    Economic growth in the U.S. slowed to a 1.9 percent annual pace in the first quarter from 3.1 percent in the previous three months.

    In Europe, Ireland joined Portugal and Greece as the third euro-area nation to have its credit rating reduced to below investment grade as Moody’s Investors Service cut its rating to Ba1 this week, while European Union finance ministers struggle to contain the region’s sovereign debt crisis.
    Spending Power

    Curbing inflation is the top agenda for India’s policy makers as price gains erode spending power in a nation where the World Bank estimates more than three-quarters of the people live on less than $2 a day.

    Reserve Bank Governor Duvvuri Subbarao said last month that “domestic inflation risks remain high,” and that “some short-run deceleration in growth may be unavoidable in bringing inflation under control.” India’s economy may grow “around 8 percent” in the year through March from 8.5 percent in the previous 12 months, he estimated.

    India’s industrial production rose 5.6 percent in May from a year earlier, the least since August 2010, the Central Statistical Office said this week.

    “From the perspective of the central bank, their role is still to try to contain inflation from getting out of hand regardless of the episode,” David Cohen, a Singapore-based economist for Action Economics, who previously worked at the U.S. Federal Reserve, said referring to yesterday’s attacks.

    To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.