India Inflation Accelerates to 13-Year High of 11.42%

By Kartik Goyal

June 27 (Bloomberg) -- India's inflation accelerated more than estimated to the fastest pace in 13 years, suggesting the central bank may add to this month's two interest rate increases.

Wholesale prices rose 11.42 percent in the week to June 14, after gaining 11.05 percent in the previous week, the government said in a statement in New Delhi today. Economists surveyed by Bloomberg News predicted an 11.22 percent increase.

The Reserve Bank of India this week increased its key rate to a six-year high of 8.5 percent, joining central banks across Asia in raising borrowing costs as soaring fuel and commodity prices stoke inflation. Governor Yaga Venugopal Reddy may lift the Indian benchmark by a further 100 basis points before the end of the year, according to HSBC Holdings Plc.

``Policy authorities are clearly becoming more and more concerned about the inflationary situation,'' said Robert Prior- Wandesforde, an economist at HSBC in Singapore. ``We expect inflation to remain in double-digits for about nine months.''

Reddy on June 24 raised the repurchase rate by 0.5 percentage point and lifted the cash reserve ratio to 8.75 percent from 8.25 percent, to prevent money in the banking system from fanning inflation. The move followed a quarter-point increase in the benchmark interest rate to 8 percent on June 11.

Money supply in India's banking system grew 21.4 percent from a year earlier to 41 trillion rupees ($953.5 billion) in the week ended June 6, more than the Reserve Bank's target of 16.5 percent to 17 percent for the fiscal year ending March.

Taiwan, Indonesia

The Bombay Stock Exchange's Sensitive Index has declined 31 percent this year on concern faster inflation and higher borrowing costs will hurt growth. The index fell 3.37 percent as of 12:09 p.m. in Mumbai. The yield on the 8.24 percent note due April 2018 dropped 2 basis points to 8.62 percent.

Taiwan yesterday raised its key rate to a seven-year high to help curb inflation. Indonesia and the Philippines lifted borrowing costs this month and China increased its cash reserve ratio for the fifth time this year to a record 17.5 percent.

Inflation is accelerating elsewhere in Asia, almost doubling in Japan to 1.5 percent in May. South Korean consumer prices in June probably rose more than 5 percent for the first time since 1998, according to a Bloomberg survey.

The increase in Indian borrowing costs came a month before the next monetary policy meeting scheduled on July 29, as an increase in retail fuel prices pushed inflation to more than double the central bank's year-end target of 5.5 percent.

Bread, Tea

Soaring food prices are also stoking inflation in India, where more than half the population of 1.1 billion survive on less than $2 a day. Food product costs, including bread, salt, cooking oil and tea, jumped 14 percent in the week to June 14 from a year earlier, according to today's report.

``With rising cost pressures, inflation is likely to remain in double digits for most of 2008,'' said Sonal Varma, an economist at Lehman Brothers Holdings Inc. in Mumbai. ``The Reserve Bank is expected to follow up with another 25 basis points increase in the repurchase rate and 50 basis points increase in the cash reserve ratio.''

The central bank in April twice lifted the cash reserve ratio to curtail the availability of money in the system. Higher borrowing costs forced State Bank of India, the nation's largest lender, to raise lending rates by 50 basis points. ICICI Bank said it hasn't yet decided to increase interest rates.

Slower Growth

Faster inflation, fuelled by surging food and energy prices, may slow the pace of growth in Asia's emerging economies this year, Asian Development Bank President Haruhiko Kuroda said in a June 25 interview. Asian economies excluding Japan and Australia may expand about 7 percent in 2008, lower than the ADB's April estimate of 7.6 percent, and last year's 8.7 percent expansion.

India's central bank expects growth to slow to 8.5 percent in the fiscal year that started April 1 from 9 percent in the previous 12-month period.

``Cost-push inflation, interest rate hikes and tighter financial conditions will slow growth even further,'' said Varma, who expects India's economy to expand 7.3 percent in the current fiscal year.

Inflation is likely to remain in double-digits at least for two more months before slowing as measures taken by the government start impacting prices, Indian Trade Minister Kamal Nath said yesterday.

Crude oil prices touched an all-time high of $140.39 a barrel on June 26, raising concern India's import costs will surge. The South Asian nation relies on crude oil from overseas to meet three-quarters of its energy needs.

The government may revise today's preliminary wholesale- price estimate in two months after receiving additional data. The commerce ministry today raised its inflation estimate for the week ended April 19 to 8.23 percent from 7.57 percent.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.