India Wholesale Prices Fall for Fourth Straight Week

By Kartik Goyal

July 9 (Bloomberg) -- India’s wholesale prices fell for a fourth straight week, ahead of a government increase in fuel costs that may rekindle inflation pressures in coming months.

The benchmark wholesale-price index declined 1.55 percent in the week to June 27 from a year earlier after tumbling 1.30 percent in the previous week, the government said today. Prices plunged 1.61 percent in the first week of June, the biggest drop since December 1978, according to central bank data.

Declines won’t last for long after last week’s first increase in fuel prices in more than a year. The reemergence of inflationary pressures may prompt the central bank to start raising interest rates from a record low by early 2010, according to economist Indranil Sen Gupta.

“Rising inflation risks buttress our expectation of the Reserve Bank of India reversing its easy money policy by January-April 2010,” said Gupta, an economist at Bank of America-Merrill Lynch in Mumbai. “We continue to expect wholesale-price inflation to turn up after September.”

Other gauges of inflation, which India’s central bank also monitor when determining the direction of monetary policy, remain high.

Consumer prices paid by farm and rural workers jumped 10.21 percent in May from a year earlier and have averaged gains of more than 10 percent for the past 12 months. Consumer prices paid by industrial workers rose 8.63 percent in May from a year earlier, according to the latest government data.

Consumer Prices

India has four consumer price indices and uses the wholesale-price index as the benchmark as the other inflation measures don’t capture the aggregate price picture.

The difference between the wholesale and consumer-price indexes can be attributed to the weighting given to food items. Food accounts for as much as 70 percent of the consumer-price index, compared with just 27 percent of the wholesale-price index, according to the central bank.

“Such divergences in alternative inflation measures complicate the conduct of monetary policy in India,” central bank Governor Duvvuri Subbarao said on July 2. The Reserve Bank of India, which last cut borrowing costs on April 21, next meets to set interest rates in Mumbai on July 28.

The yield on the 6.07 percent note due May 2014 held at 6.34 percent as of 11:55 a.m. in Mumbai, unchanged from before the release of the inflation report, according to the central bank’s trading system.

No Deflation

The government is working on creating two new consumer price indexes for rural and urban areas, Finance Minister Pranab Mukherjee said July 3.

India is not in the grip of deflation as food-price inflation continues to be in double-digits, according to Governor Subbarao. The bank will review its 4 percent wholesale- price inflation target for the year to March 2010 when it meets later this month, he said.

Prime Minister Manmohan Singh’s government last week raised retail fuel costs for the first time in more than a year, making gasoline in the capital New Delhi 9.8 percent more expensive. Cooking gas and kerosene prices were left unchanged.

The index of fuel prices declined 12.42 percent from a year earlier in the week to June 27, following a similar fall in the previous week, today’s report showed. Prices of eggs, tea, corn, oilseeds, sugar, edible oils and fertilizers rose in the week.

Faster economic growth may also stoke inflation pressures in India and could force the central bank to start unwinding the interest-rate cuts commenced in October last year.

‘Bottoming Out’

India’s $1.2 trillion economy may expand as much as 7.75 percent in the year ending March 2010 amid signs of a “bottoming out” in the U.S. and harvests benefiting from monsoon rains, the Finance Ministry said July 2. Asia’s third- largest economy grew 6.7 percent in the previous 12 months.

Signs of economic recovery across Asia have prompted central banks in the region to stop cutting rates. The Bank of Korea kept its benchmark interest rate unchanged for a fifth month today on signs the economy is recovering from the worst global recession since the Great Depression. Australia’s central bank kept interest rates unchanged for a third month this week.

The International Monetary Fund said yesterday the global economic rebound next year will be stronger than it forecast in April as the financial system stabilizes, predicting the world economy will grow 2.5 percent in 2010.

India’s wholesale-price index published today may be revised in two months, after the government receives additional data. The commerce ministry today revised the rate for the week ended May 2 to 1.48 percent from 0.48 percent.

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