BL>India’s Inflation Unexpectedly Accelerates to 10.16%
June 14, 2010, 3:45 AM EDT
By Unni Krishnan
June 14 (Bloomberg) -- India’s inflation unexpectedly accelerated in May, sending bond yields to a one-month high as pressure mounts on the central bank to raise borrowing costs.
Prices are rising in tandem with strengthening consumer demand, evidenced by the 17.6 percent surge in industrial output in April. The Reserve Bank of India says it will tighten the monetary policy at a “moderate” pace given the risks to economic expansion from Europe’s sovereign-debt crisis.
“They don’t want to go too fast on raising rates but the risks are that they are going too slow now,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “Controlling inflation should be the RBI’s top priority.”
The yield on the 10-year government bond rose three basis points to 7.64 percent as of 12:45 p.m. in Mumbai. The Sensitive Index rose 0.9 percent to 17,225.46 on the Bombay Stock Exchange while the rupee climbed 0.5 percent to 46.57 against the dollar.
The Reserve Bank has increased rates twice since mid-March by a quarter percentage point each time. The benchmark reverse repurchase rate is 3.75 percent.
‘Aggressive Action’
More “aggressive actions” may run the risk of reversing the steps should global growth falter, central bank Deputy Governor Subir Gokarn said on June 7.
India and China, Asia’s fastest-growing major economies, are battling to contain inflation as the region shows little signs of being affected by Europe’s debt woes.
China’s consumer-price inflation rate rose 3.1 percent in May, the quickest pace in 19 months, highlighting overheating risks in the economy.
Indian central bank Governor Duvvuri Subbarao is facing other headwinds to tighten monetary policy.
The central bank needs to consider a credit crunch while setting rates as the payment of license fees for third- generation phone services drained cash, Kaushik Basu, chief economic adviser in the finance ministry, said June 3.
As operators including Bharti Airtel Ltd. prepared to pay $14.5 billion for wireless permits, the RBI on May 27 was forced to ease rules until July 2 to boost liquidity.
Cash Crunch
The central bank said lenders can raise more cash by cutting their debt holdings by as much as 0.5 percentage point below the minimum regulatory requirement of 25 percent of deposits.
The cash crunch may also prompt India to postpone or cut the size of its scheduled bond sales this week, JPMorgan Chase & Co. and Securities Trading Corp. said. The finance ministry is due to auction up to 110 billion rupees ($2.4 billion), according to the government’s debt sale calendar.
Overnight interbank rates climbed to 5.43 percent on June 11, their highest level in more than two months. The average amount of cash borrowed each day by banks from the central bank’s repurchase auction window jumped six-fold last week.
Prices of rice, wheat and other so-called “primary articles” rose 16.6 percent in May from 13.88 percent in the previous month, today’s report showed. Manufacturing inflation rate was at 6.41 percent last month.
Gokarn said June 7 that food costs may decline this year if monsoon rains are sufficient.
The June-September monsoon is the main source of irrigation for India’s farms. Prices of agriculture products rose after last year’s showers were the least since 1972.
--Editors: Cherian Thomas, Lily Nonomiya
To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.
To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net. NI INDIA NI ASIA NI ASIAX NI EM NI ECO NI INDECO NI BON NI INB NI FX NI FRX NI RBI NI CEN NI INF NI GOV
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