Indian inflation rises to highest in seven years

New Delhi: Indian inflation raced to its highest in seven years at the end of May and could top 10 per cent this month as higher fuel prices feed in, stoking speculation of more central bank tightening after this week's rate hike.

The Reserve Bank of India on Wednesday unexpectedly raised its key lending rate by 25 basis points to eight per cent to contain inflation expectations, but left all other rates unchanged.

It was the first hike in the repo rate in more than a year, but with the impact of costlier petrol and diesel yet to be felt, analysts said more could be around the corner.

"The number is a surprise given the fuel price hike is yet to be factored in. We see headline inflation crossing 10 per cent next week and remaining around 9.5 per cent in June and July," said A Prasanna, economist at ICICI Securities in Mumbai.

"With this kind of inflation behaviour, we do not rule out further policy action in the July review."

Wholesale price inflation, India's most widely watched measure, rose 8.75 per cent in the 12 months to May 31, well above expectations, data released yesterday showed.

That was a substantial jump from the previous week's annual rise of 8.24 per cent and a forecast of 8.28 per cent in a Reuters poll of economists.

The inflation rate is now at its highest since February 10, 2001, when it was 8.77 per cent. Continuing a trend of sharp upward revisions, inflation for the week ended April 5 was revised up to 7.71 per cent from a provisional 7.14 per cent.

Forecast

A Reuters poll carried out last week on the day fuel prices were raised showed economists expected the increases to lift inflation to a 13-year high of 9.2 per cent in the 12 months to June 7, but forecasts are now being revised.

"With the fuel price pass-through we are staring at double-digit inflation. This is crazy," said D.K. Joshi, principal economist at domestic ratings agency Crisil in Mumbai.