Indian inflation rises to 3-year high

 

India’s key inflation rate has surged to a three-year high, the government said on Friday, raising the possibility of the central bank raising interest rates soon despite signs of a slowing economy.

 

The wholesale price index-based inflation rate accelerated to 7 per cent on year in the week that ended March 22 from 6.68 per cent a week earlier, according to data released by the Ministry of Commerce and Industry.

 

For the fifth straight week, the inflation rate breached the Reserve Bank of India’s stated comfort level of 5 per cent for the financial year that ended on Monday.

 

“These are ugly numbers. I think the Reserve Bank of India will do a combination of Market Stabilization Scheme bond issuance and a 50-basis point cash reserve ratio hike,” said Shubhada Rao, Chief Economist at Yes Bank.

 

Manufactured products gained 0.2 per cent in the week that ended March 22, pushed up by a 9 per cent on-week rise in sunflower oil and a 4 per cent rise each in gingerly oil and hydrogenated oil. There were also significant gains in the price of minerals and iron ore.

 

The central bank already has raised the repurchase, or overnight lending, rate by 150 basis points since January 2006 to the current 7.75 per cent. It also has raised the amount that banks have to set aside as cash reserves with the central bank to 7.50 per cent of deposits to curb liquidity.

 

The tightening has contributed to a deceleration in India’s economic growth to 8.4 per cent on year in the third quarter of the last fiscal year, from 8.9 per cent in July-September quarter and an 18-year high of 9.6 per cent in the fiscal year that ended on March 31.

 

Worries about a soft patch in the world’s second-fastest growing major economy were reinforced after industrial production in January rose just by 5.3 per cent on year, compared with 11.6 per cent a year earlier and 7.7 per cent on year in December.

 

“High inflation is a global supply-side phenomenon, rather than economic overheating,” said KV Kamath, chief executive officer of ICICI Bank, the largest local private bank by assets. “I am sure the policy makers – monetary as well as fiscal – know that we need to work in terms of easing supply constraints.” (AP)