Indian inflation tops 12% for first time in 13 years

Mumbai: India's inflation accelerated to the fastest pace in more than 13 years, making more difficult the central bank's job of containing prices amid slowing growth.

Wholesale prices rose 12.01 per cent in the week to July 26, after gaining 11.98 per cent in the previous week, the commerce ministry said in New Delhi today. Economists had expected a 12.01 per cent increase.

The fastest price gains since 1995 have prompted the Reserve Bank of India to raise interest rates three times in two months. That's squeezing consumer spending and hurting sales of companies such as Tata Motors and Maruti Suzuki India, which makes half the cars sold in the country.

"The central bank has already pressed the monetary brakes very hard," said Dharmakirti Joshi, an econ-omist at Mumbai-based Crisil, the local unit of Standard & Poor's. "Depending upon oil prices and money supply in the system, the bank may lift its repurchase rate by 25 basis points in its October policy."

Rate rise

Governor Y.V. Reddy last week raised the central bank's benchmark rate by a half point to a seven-year high of 9 per cent and increased the reserve requirements for commercial lenders to 9 per cent from 8.75 per cent.

Higher borrowing costs are helping to reduce funds in the banking system. Money supply, which mainly comprises currency in circulation, bank deposits and funds invested in other savings plans, grew 20 per cent in the two weeks to July 18 from a year earlier, compared with 20.5 per cent in the previous two weeks.

Surging energy and commodity prices are fuelling inflation across Asia. Consumer prices in the Philippines rose 12.2 per cent in July from a year earlier, the fastest pace in more than 16 years. Taiwan's inflation accelerated to 5.92 per cent in July, the quickest in almost 14 years.

The Bank of Korea yesterday raised its benchmark interest rate to the highest in almost eight years to tame the fastest inflation in a decade, joining central banks in Indonesia, Taiwan, Thailand and the Philippines.

Faster inflation and higher borrowing costs are affecting sales of vehicles made by Maruti Suzuki and Tata Motors.

Maruti Suzuki's sales increased 1.1 per cent in July, the slowest pace in four months. Sales at Tata Motors fell 3.3 per cent in July as demand fell.

Runaway inflation forced the central bank last week to raise its year-end inflation target to 7 per cent from 5.5 per cent and to lower its economic growth estimate for the year ending March 2009 to 8 per cent from an earlier prediction of 8 per cent to 8.5 per cent.

Inflation is likely to moderate to "somewhere around 8 per cent" by the end of March 2009, C. Rangarajan, head of Indian Prime Minister Manmohan Singh's economic advisory council, said yesterday.