Inflation in India hit a seven-month high last month as the country struggles with slowing economic growth and rising prices.
The wholesale price index, India’s main gauge of inflation, rose 6.46 per cent last month, compared to an increase of 6.1 per cent in August, official data released yesterday showed.
“Unrelenting food and fuel prices took September inflation to a seven-month high,” said Sujan Hajra, the chief economist at Anand Rathi, a financial services firm in Mumbai.
Food prices last month rose 18.4 per cent from the same period last year, with the cost of onions surging 322.94 per cent, while vegetables in general were up 89.37 per cent, the data showed. Fuel and power prices increased 10 per cent, with the weak rupee making imports more costly.
India’s economy faces challenges. Economic growth slumped to a decade low of 5 per cent in the latest financial year. At the same time the government has been grappling with large deficits and a flight of funds from emerging markets on signs of economic improvement in the United States. That sent the rupee tumbling to historic lows over the summer.
The rupee dipped on the latest inflation data, with the US dollar trading up 0.76 per cent at 61.54 rupees yesterday afternoon.
The IMF last week issued a forecast that India’s economy would grow by only 3.8 per cent this year compared to a previous prediction in July of 5.6 per cent.
The latest inflation figures support the case for another interest rate rise, some analysts say.
Raghuram Rajan, who took over as governor of the Reserve Bank of India (RBI) last month, unexpectedly lifted the central bank’s repo rate to 7.5 per cent from 7.25 per cent in an effort to curb inflation. (The repo rate is the interest rate at which the central bank buys government securities from commercial banks; a rising repo rate is meant to constrict the money supply and therefore fight inflation.)
Analysts are concerned that risks of increasing inflation have not gone away.
“Our discomfort on [the] future inflation trajectory emanates from the fact that policy changes and consumption boost caused ahead of the upcoming elections are expected to aggravate inflation further,”said Dhananjay Sinha, the head of institutional research at Emkay Global Financial Services, a brokerage based in Mumbai.
“Inflationary pressures we foresee include several import restrictions in combination with an expansionary government spending, a pickup in retail credit, possible widening of trade deficit, higher election related spending stimulating consumption and a rise in rural consumption on the back of a good monsoon.”
Emkay is forecasting a quarter-point rate increase at the central bank’s next monetary policy meeting, on October 29.
Mr Hajra at Anand Rathi, however, said that “despite inflation worries, low real growth suggests no rate action in the October monetary policy meeting”.
The central bank governor, Mr Rajan, a former IMF chief economist, said on Saturday in Washington that he “was not a superman” and admitted there had been “a little bit euphoria in India” surrounding his appointment as the RBI’s leader.
Mr Rajan indicated that there would be banking sector reforms that would make it easier for foreign banks to enter India.
“That is going to be a big, big opening because one could even contemplate taking over Indian banks and so on,” he said.
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