India’s Wholesale Prices Climb a Fourth Straight Week

By Kartik Goyal

Oct. 8 (Bloomberg) -- India’s wholesale prices rose for a fourth week, making it harder for central bank Governor Duvvuri Subbarao to keep interest rates low and boost economic growth without fanning inflation.

The benchmark wholesale-price index climbed 0.7 percent in the week to Sept. 26 from a year earlier, after rising 0.83 percent in the previous week, the Commerce Ministry said in New Delhi today. That compared with the median forecast for a 1 percent gain in a Bloomberg News survey of 20 economists.

Price pressures are resurfacing across Asia due to a surge in commodity prices, forcing policy makers to start thinking about increasing borrowing costs after bringing them to record lows to counter the global recession. Australia on Oct. 6 unexpectedly raised its benchmark interest rate, prompting economists at Moody’s Economy.com to say others may follow.

“The Reserve Bank of India’s communications are likely to be increasingly hawkish in a bid to manage inflationary expectations,” said Sujan Hajra, chief economist at Anand Rathi Financial Services Ltd. in Mumbai. “India’s monetary authorities face a quandary.”

The yield on the 6.90 percent note due in 2019 fell three basis points to 7.22 percent as of 11:57 a.m. in Mumbai, from 7.25 percent before the report, according to the central bank’s trading system.

Sugar, Lentils

India’s wholesale prices rose in September after declining for three months, and consumer-price inflation is already running above 10 percent. Price gains may accelerate as the driest monsoon since 1972 creates food shortages.

Today’s report showed sugar prices gained 42.69 percent in the week to Sept. 26 from a year earlier. Lentil and rice costs rose 20.45 percent and 17.2 percent, respectively, while vegetable prices surged 43 percent. Gasoline, metal and cooking- oil prices declined.

Finance Minister Pranab Mukherjee said yesterday inflation may accelerate to as high as 6 percent by the end of March, more than the central bank’s 5 percent estimate.

Subbarao said this week the South Asian nation may have to raise interest rates ahead of advanced economies “in view of incipient inflationary pressures.”

India needs a “careful management of trade-offs” between supporting growth with lower borrowing costs and curbing inflation, the governor said in Istanbul on Oct. 5. “An early exit on inflation concerns runs the risk of derailing the fragile growth, while a delayed exit many engender inflation expectations.”

Consumer Prices

Consumer prices paid by farm workers jumped 12.89 percent in August from a year earlier. Inflation for rural workers was 12.67 percent and consumer prices paid by industrial workers climbed 11.72 percent.

“With inflation coming higher than expected, rate hikes are coming closer,” Pranjul Bhandari and Tushar Poddar, Mumbai- based economists with Goldman Sachs Group Inc., wrote in a report. They expect India’s first rate increases in January and predict the central bank may raise the reverse-repurchase rate by 300 basis points in 2010 to 6.25 percent.

The Reserve Bank of India cut interest rates six times from October 2008 to April 2009 to shield India’s $1.2 trillion economy from the worst global recession since the Great Depression. In the last monetary policy announcement on July 28, it left the reverse-repurchase rate unchanged at 3.25 percent and kept the repurchase rate at 4.75 percent.

The central bank will review interest rates on Oct. 27.

‘Inevitable’ Moves

“Central banks in China, India and South Korea are keeping a close watch on rising economic activity and emerging inflation pressures,” said Matt Robinson, an economist at Moody’s Economy.com in Sydney. “As sentiment in global financial markets improves and signs emerge that global growth is resuming, it is inevitable that central banks in the region will raise interest rates.”

India’s wholesale-price index published today may be revised in two months, after the government receives additional data. The ministry revised the rate for the week ended Aug. 1 to a drop of 0.83 percent from a decline of 1.74 percent.

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