India steps up anti-inflation fight

Mumbai: India faces pressure to step up its battle against price gains even after the steepest interest-rate increases among Asia's major economies, as oil costs rise and consumer demand strengthens.

The Reserve Bank of India on Thursday raised its inflation forecast for the second time since late January as it lifted the benchmark repurchase rate by a quarter-point to 6.75 per cent, the eighth move in a year.

"The pressures to manage inflation, out of the evolving domestic and global situations, have only intensified," Shanto Ghosh, an economist at Deloitte Touche Tohmatsu India Pvt., said in an interview from New Delhi yesterday.

"The pace of further monetary tightening may see some acceleration."

Governor Duvvuri Subbarao may boost borrowing costs by another 0.75 percentage point in 2011, HSBC Holdings Plc and DBS Group Holdings Ltd. said.

India imports three-quarters of its energy needs and oil has surged 25 per cent in the past 12 months, stoked by political turmoil in the Middle East and Libya that threatens supplies.

"The RBI would now appear even more concerned about the inflation outlook," said Leif Eskesen, an economist at HSBC in Singapore. "Inflation risks clearly remain the dominant concern, especially considering the current cocktail of elevated food prices, rising international commodity prices and demand- led inflation pressures."

The Bombay Stock Exchange's Sensitive Index fell 0.7 per cent at 10am in Mumbai, extending declines this year to 12.1 per cent, the most in Asia. India's 11-year bond yields climbed four basis points to 8.12 per cent, while the rupee strengthened 0.2 per cent to 45.08 per dollar.

Subbarao's eight rate increases in the past year compare with three in China and four in South Korea. Indonesia lifted its reference rate last month for the first time this year after opting not to join counterparts in boosting rates in 2010.

India's key wholesale-price inflation unexpectedly quickened to 8.31 per cent in February, led by manufactured product costs.

Consumer demand

That prompted the Reserve Bank to predict the price gauge will reach 8 per cent at the end of March, compared with 7 per cent it estimated on January 25.

"Risks to inflation remain clearly on the upside, reinforced by the persistence of demand-side pressures as reflected in non-food manufacturing," the Reserve Bank said in its statement yesterday.

The central bank said non-food manufacturing inflation, which reflects the strength in consumer demand, accelerated to 6.1 per cent in February from 4.8 per cent in the previous month.

"The acceleration was spread across manufacturing activities, indicating that producers are able to pass on higher input prices to consumers," the bank said.

General Motors Co's India unit, which had raised prices by as much as 2 per cent in January, may boost them again by the end of this month, Karl Slym, head of the Detroit-based company's local unit, said in an interview with Bloomberg News on March 4.

Videocon Industries Ltd, an Aurangabad, India-based maker of television sets, refrigerators and washing machines, will probably pass on the "relentless surge" in raw material costs to customers, Suresh M. Hegde, head of finance at the company, said in a March 15 interview.

India's $1.3 trillion economy may expand by as much as 9.25 per cent in the fiscal year starting April 1, the fastest pace since 2008, the finance ministry forecast last month.

Tax cuts

Demand may strengthen after Finance Minister Pranab Mukherjee's budget for the fiscal year starting April 1 proposed increasing spending by 13.4 per cent to Rs12.6 trillion ($279 billion).

It also includes plans to exempt incomes below Rs180,000 from tax, higher than the previous threshold of Rs160,000.

Prime Minister Manmohan Singh's coalition is aiming to put more money in the hands of voters to help them cope with rising prices and shore up support for five state elections this year.

The central bank said the purchasing managers' index, higher tax collections and expansion in bank credit provide evidence that India's growth momentum is intact.

Manufacturing in India grew at the fastest pace in three months in February, according to the purchasing managers' index released by HSBC and Markit Economics. Loans extended by lenders including ICICI Bank Ltd. gained 23.21 per cent in the two weeks to February 25, near the fastest pace in more than two years. Even as inflationary pressures have "accentuated", risks to growth are emerging, the Reserve Bank said.

"Rising global commodity prices, particularly oil, are a major contributor to both developments," it said.

Rupee heading for weekly gain

Mumbai India's rupee rose, headed for a weekly gain, after the central bank raised interest rates Thursday for the eighth time in a year to tame inflation.

The currency rose to a one-week high after the Reserve Bank of India increased its repurchase rate by 0.25 percentage point to 6.75 per cent. Foreign holdings of Indian debt climbed $3.26 billion this year to a record $20.9 billion as of March 15, data published by the Securities and Exchange Board of India show.

The rupee gained as the Dollar Index, which tracks the greenback against the currencies of six major US trading partners, lost 0.8 per cent last week.

The RBI's "hawkish undertone may benefit the rupee if markets perceive the central bank to be ahead of the curve," Singapore-based strategists at Oversea-Chinese Banking Corp. including Selena Ling and Emmanuel Ng wrote in a research note yesterday. "Further rupee gains can be expected either on broad Dollar Index weakness or a strong resumption of inflows into Asian asset markets."

The Indian currency appreciated 0.2 per cent to 45.0875 per dollar in Mumbai, taking last week's advance to 0.3 per cent, according to Bloomberg data.

It touched 45.055 yesterday, the strongest level since March 10. The rupee may strengthen to 44 by the end of the year, according to the median estimate of 17 analysts in a Bloomberg News survey.

The benchmark wholesale-price index climbed 8.3 per cent in February following an 8.2 per cent gain the previous month, the Commerce Ministry said March 14.

Offshore forwards indicate the rupee will trade at 45.89 to the dollar in three months, compared with expectations of 45.98 yesterday and 46.06 at the end of last week.