By Rajkumar Ray
NEW DELHI (Reuters) - India's annual inflation rate topped 5 percent in early June, accelerating to its highest level in more than a year and bolstering the chances of an increase in official interest rates in July.
Friday's government data showed the annual inflation rate for the week of June 10, based on wholesale prices, was 5.24 percent, higher than expected and up from 4.72 percent a week earlier due to an increase in the cost of fuel, food and manufactured goods.
The data came a day after the government allowed private players to import wheat, pulses and sugar under easier terms in order to hold down the price of foodstuffs, which have shot up in the past few weeks.
Finance Minister Palaniappan Chidambaram said the government could take further action to contain inflation, which is at its highest level since May 2005.
"Monetary measures have been taken. Some fiscal steps have been taken and some action has been taken on the import side," he told reporters. "I am confident that these steps will moderate inflation. If necessary we will take further steps."
Analysts had expected the latest data to show annual wholesale price inflation at 5.02 percent and the higher figure sent federal bond yields to four-year highs.
The yield on the benchmark 10-year bond rose six basis points to 8.19 percent, its highest since May 2002, as investors priced in more interest rate increases in India and the United States.
"We expect the inflationary pressures to continue to build up," said Shubhada Rao, chief economist at YES Bank in Mumbai.
"Looking at the global cues and the domestic inflation, we expect interest rates to harden and a 25-basis-point increase is on the cards in the July review."
MONETARY MEASURES
The latest inflation data included a 9.2 percent increase in petrol prices and a 6.6 percent rise in diesel prices made on June 5 as the government tried to ease losses at state-run refiners due to soaring crude oil costs.
Economists had expected the increase in retail fuel prices to add 0.35 percentage point to the reading and some see the inflation rate topping 5.5 percent within months because of a second-round impact in the economy.
On June 8 the Reserve Bank of India raised its benchmark short-term reverse repo rate by 25 basis points to 5.75 percent in a surprise move that analysts said was primarily aimed at controlling inflation after the fuel price rise.
It was the second quarter-point increase this year, taking the rate to its highest level since June 2002. The central bank is scheduled to review policy again on July 25.
Some analysts expect the central bank to raise the cash reserve ratio (CRR) from 5.0 percent to rein in surplus funds and curb inflation expectations. The CRR is the percentage of deposits that banks have to keep as cash with the central bank.
"The rise in oil prices has come with a lag and could last for a longer period," said Madan Sabnavis, chief economist at National Commodity & Derivatives Exchange, Mumbai. "There would be pressure on the Reserve Bank of India to raise interest rates."
Source : Reuters 2006
NEW DELHI (Reuters) - India's annual inflation rate topped 5 percent in early June, accelerating to its highest level in more than a year and bolstering the chances of an increase in official interest rates in July.
Friday's government data showed the annual inflation rate for the week of June 10, based on wholesale prices, was 5.24 percent, higher than expected and up from 4.72 percent a week earlier due to an increase in the cost of fuel, food and manufactured goods.
The data came a day after the government allowed private players to import wheat, pulses and sugar under easier terms in order to hold down the price of foodstuffs, which have shot up in the past few weeks.
Finance Minister Palaniappan Chidambaram said the government could take further action to contain inflation, which is at its highest level since May 2005.
"Monetary measures have been taken. Some fiscal steps have been taken and some action has been taken on the import side," he told reporters. "I am confident that these steps will moderate inflation. If necessary we will take further steps."
Analysts had expected the latest data to show annual wholesale price inflation at 5.02 percent and the higher figure sent federal bond yields to four-year highs.
The yield on the benchmark 10-year bond rose six basis points to 8.19 percent, its highest since May 2002, as investors priced in more interest rate increases in India and the United States.
"We expect the inflationary pressures to continue to build up," said Shubhada Rao, chief economist at YES Bank in Mumbai.
"Looking at the global cues and the domestic inflation, we expect interest rates to harden and a 25-basis-point increase is on the cards in the July review."
MONETARY MEASURES
The latest inflation data included a 9.2 percent increase in petrol prices and a 6.6 percent rise in diesel prices made on June 5 as the government tried to ease losses at state-run refiners due to soaring crude oil costs.
Economists had expected the increase in retail fuel prices to add 0.35 percentage point to the reading and some see the inflation rate topping 5.5 percent within months because of a second-round impact in the economy.
On June 8 the Reserve Bank of India raised its benchmark short-term reverse repo rate by 25 basis points to 5.75 percent in a surprise move that analysts said was primarily aimed at controlling inflation after the fuel price rise.
It was the second quarter-point increase this year, taking the rate to its highest level since June 2002. The central bank is scheduled to review policy again on July 25.
Some analysts expect the central bank to raise the cash reserve ratio (CRR) from 5.0 percent to rein in surplus funds and curb inflation expectations. The CRR is the percentage of deposits that banks have to keep as cash with the central bank.
"The rise in oil prices has come with a lag and could last for a longer period," said Madan Sabnavis, chief economist at National Commodity & Derivatives Exchange, Mumbai. "There would be pressure on the Reserve Bank of India to raise interest rates."
Source : Reuters 2006