Inflation Quickens In June; Another Rate Rise Expected

14 July, 2011

India’s inflation quickened in June, driven by higher prices of manufactured goods and fuel, adding pressure on the Reserve Bank of India (RBI) to raise rates at its policy review later this month despite signs of slowing growth in Asia’s third-largest economy.

New Delhi raised local prices of diesel, cooking gas and kerosene last month to cushion its finances and provide relief to government oil companies reeling from revenue losses on state-set fuel prices amid high global crude prices, adding to inflationary pressure.

The wholesale price index, India’s main inflation gauge, rose an annual 9.44 per cent in June, below the median forecast for a 9.70 per cent rise in a Reuters poll.

However, April inflation was revised sharply higher, to 9.74 per cent from 8.66 per cent, an indication that the final inflation figure for June could breach double-digits.

Annual fuel price inflation accelerated to 12.85 per cent in June from 12.32 per cent in May, while annual manufacturing inflation quickened to 7.43 per cent from 7.27 per cent.

“Today’s inflation data will force the RBI to continue with its tightening but given the signs of slowdown in certain interest rate sensitive sectors they will settle for a 25 bps increase instead of front loading the rate hikes,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The RBI chief last week voiced concern about sharp revisions in macroeconomic data, including growth and inflation figures, which he said could disrupt calculations when setting policy.

“I am suspecting that this number will also get revised upwards as we had seen a very sharp increase in food, fuel and mineral prices in the month of June,” Nitsure said.

The benchmark 7.80 per cent 2021 bond yield rose 3 basis points to 8.29 per cent following the sharp upward revision in April inflation data. The 5-year overnight indexed swap rates rose 6 bps to 7.56 percent and 1-year was 9 bps higher at 7.96 per cent.

The June PMI for manufacturing and the industrial output growth for May dropped to nine-month lows, indicating a soft patch in the economy, but that is unlikely to deter the Reserve Bank of India (RBI) from raising rates at the July 26 policy review.

The RBI has raised rates 10 times since March 2010 and is widely expected to raise rates by 25 basis points this month.

Goldman Sachs estimates that the direct impact of the hike in fuel prices would be about 60 basis points and the overall impact on inflation would be around 90 basis points.

Diesel, cooking gas and kerosene comprise 6.4 per cent of the WPI basket and 70 per cent of the fuel component of the WPI.

Most analysts expect the RBI to go through with a 50 basis points hike this year that will take the repo rate to 8 percent before it pauses.

 


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Inflation Quickens In June; Another Rate Rise Expected

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