India's Inflation Accelerates to Fastest in 13 Years

By Kartik Goyal

July 4 (Bloomberg) -- India's inflation accelerated to the fastest pace in more than 13 years, strengthening the case for the central bank to increase borrowing costs this month.

Wholesale prices rose 11.63 percent in the week to June 21, after gaining 11.42 percent in the previous week, Commerce Ministry Spokesman Rajeev Jain told Bloomberg News in a telephone interview in New Delhi today. The median forecast of 16 economists surveyed by Bloomberg News was for an 11.47 percent increase.

Faster inflation is threatening the popularity of Prime Minister Manmohan Singh's government, which is struggling to survive as its communist allies consider withdrawing their support over a nuclear deal with the U.S. A nationwide truckers' strike may have added to inflation.

``Miseries don't come alone,'' said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor's. ``The political disharmony, inflation and the truckers' strike have disrupted the smooth functioning of the economy.''

Soaring energy, food and commodities prices are pushing up inflation around the world and forcing central banks to raise borrowing costs amid slowing economic growth. Sweden and Indonesia raised their benchmark interest rates yesterday, as did the European Central Bank. China has increased its cash reserve ratio to a record 17.5 percent.

Rate Increase

The Reserve Bank of India, which next meets to review rates on July 29, last month raised its benchmark interest rate twice to a six-year high of 8.5 percent and lifted its cash reserve ratio to 8.75 percent, to prevent money supply in the banking system from fanning inflation.

India's 10-year bonds fell for a fifth day, pushing yields to the highest in seven years. The yield on the benchmark 8.24 percent note rose 14 basis points to 8.95 percent as of 11:28 a.m. in Mumbai, according to data compiled by Bloomberg.

More than 4 million heavy and light commercial vehicles stayed off the nation's roads for two days this week to protest against taxes and rising fuel costs. The strike ended late yesterday after the government decided to roll back an increase in toll tax and promised not to raise the charge for one year, said Charan Singh Lohara, president of truckers' union.

The government increased retail fuel prices on June 4, pushing inflation to more than double the central bank's year- end target of 5.5 percent.

Political Impact

Rising prices have caused Prime Minister Singh's Congress party to lose ground in nine of 11 state elections since January 2007. Singh faces elections in six more states this year and national elections by May 2009.

To contain inflation that has tripled in the past seven months, the government yesterday banned exports of corn after restricting overseas sales of food items including wheat, rice, cooking oils and pulses. India had earlier banned cement exports and imposed a tax on outgoing shipments of steel products.

``Inflation is likely to hit 13 percent in a month,'' Joshi of Crisil said. The Reserve Bank may raise the repurchase rate by 25 basis points in the July meeting and increase the cash reserve ratio, depending on the liquidity in the system, he said.

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