India's soaring inflation will force central bank to act

New Delhi: Indian inflation rose further above 8 per cent in late May, data showed on Friday, and with higher fuel prices seen sending it to a 13-year peak early next month, analysts expect central bank action soon to ease price pressures.

Reserve Bank of India (RBI) Governor Y.V. Reddy said on Thursday the central bank was ready to employ the full range of instruments at its disposal to turn round inflation.

India's widely watched wholesale price inflation rate rose 8.24 per cent in the 12 months to May 24, above the previous week's level of 8.10 per cent but slightly below a median forecast in a Reuters poll of 8.29 per cent.

"Inflation remains high and needs to be tackled. We believe the Reserve Bank of India may hike the reverse repo and the repo rate by 25 basis points by July," Shuchita Mehta, economist at Standard Chartered Bank in Mumbai, said.

Trend

Revisions to earlier data have been sharp in the past few weeks, but Friday's figures showed this trend slowed in the week ended March 29, with inflation now at a revised 7.75 per cent, up from 7.41 per cent.

That is way above the 5-5.5 per cent the central bank had set as its comfort level for the 2007-08 financial year ending in March.

After 10 days of debate, the communist-backed ruling coalition on Wednesday agreed to raise state-set petrol and diesel prices by about 10 per cent, more than expected, to help curb losses at its state-owned refiners.

Energy costs account for 14.2 per cent of the inflation index, and the price increases will have a cascading impact on overall prices as diesel and petrol are key inputs through the economy.

A Reuters poll of analysts found the immediate impact of the fuel price rises would be to push wholesale price inflation to a 13-year high of 9.2 per cent on June 7.

Finance Minister Palaniappan Chidambaram, while admitting that inflation was a problem due to higher global crude prices, said the government was willing to take more measures to calm prices.

Some analysts said the central bank may only use the reserve requirement route to tame inflation, fearing any hike in rates would further hurt growth already seen moderating to a still strong 8-8.5 per cent this fiscal year from 9 per cent in 2007-08.

Markets were largely unchanged from before the data's release with the 10-year bond yield steady at 8.23 per cent and the rupee at 42.80/81 to a dollar.

"Our view remains that the RBI will tighten monetary policy using cash reserve ratio hikes, (and) we expect another 100 basis points worth of CRR hikes this year," said Sonal Verma, an economist at Lehman Brothers in Mumbai.