India Inflation Accelerates to 16-Year High of 12.44%

By Kartik Goyal

Aug. 14 (Bloomberg) -- India's inflation soared to a 16- year high and may accelerate further after the government approved wage increases for civil servants.

Wholesale prices rose 12.44 percent in the week to Aug. 2, after increasing 12.01 percent in the previous week, the commerce ministry said in New Delhi today. Economists were expecting a 12.2 percent gain.

Prime Minister Manmohan Singh's cabinet today approved an average 21 percent salary increase for about 5 million government employees. That may give the central bank little choice other than to raise interest rates again after three increases since June, economists said.

``We expect inflation to remain elevated and reach 13.5 percent by December,'' said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai. ``We are looking at a 50 basis point increase for both the repurchase rate and the cash- reserve ratio by year-end.''

India's 10-year bonds fell for a third day, their worst run in almost a month, on accelerating inflation. The yield on the benchmark 8.24 percent note due April 2018 climbed 5 basis points to 9.14 percent as of the 5:30 p.m. close in Mumbai, according to the central bank's trading system.

The Reserve Bank of India last month raised its benchmark rate by a half point to a seven-year high of 9 percent. The reserve requirement for commercial lenders was also lifted to 9 percent from 8.75 percent. Governor Yaga Venugopal Reddy is targeting inflation of 7 percent in the year to March.

`Tight' Policy

Prime Minister Singh's economic advisory council yesterday said the central bank needs to keep monetary policy ``tight'' amid rising prices. Faster inflation, coupled with a global slowdown, may weaken growth in India's $912 billion economy to the slowest in four years, the panel said.

Finance Minister Palaniappan Chidambaram today said the impact of increased salaries on inflation was taken into account when the cabinet approved the proposal. The higher wages will cost the government 338.6 billion rupees ($8 billion) this year.

Soaring energy and commodity prices are fanning inflation across Asia. Pakistan's inflation accelerated to a 30-year high of 24.33 percent in July. Consumer prices in Indonesia jumped 11.9 percent last month, the biggest gain in almost two years.

Inflation in India in the week to August 2 accelerated because of a rise in the cost of pulses, fruits, spices and aviation turbine fuel. Fuel-price inflation rose to 17.99 percent, compared with 17.12 percent in the previous week, today's report showed.

Fuel Prices

Fuel costs increased after Indian Oil Corp., the nation's largest refiner, raised the price of jet fuel by 2.9 percent on Aug. 1 to 2,043.03 rupees a kiloliter.

Faster inflation is squeezing consumer spending and hurting factory output. India's industrial production grew 5.2 percent in the quarter ended June 30, almost half the 10.3 percent pace in the same period a year earlier.

Mahindra & Mahindra Ltd., the biggest maker of sport- utility vehicles in India, this week said it is cutting production at its largest factory after sales dropped 4 percent in July, the first decline in local sales this year. India's passenger-car sales fell last month for the first time in more than 2 1/2 years.

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 June 7 to 11.66 percent from 11.05 percent.

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