New Delhi: Indian inflation unexpectedly accelerated in April, crimping the central bank's scope to bolster economic growth by extending interest-rate cuts. Stocks fell, erasing earlier gains.
The benchmark wholesale-price index rose 7.23 per cent from a year earlier, after climbing 6.89 per cent in March, the Ministry of Commerce and Industry said in a statement in New Delhi yesterday. The median of 32 estimates in a Bloomberg News survey was for a 6.67 per cent gain.
Reserve Bank of India governor Duvvuri Subbarao signalled last month that inflation might limit the room for further cuts after he slashed the benchmark rate by half a percentage point, flagging price risks from the fiscal deficit, energy costs and a weaker rupee. Greece's political turmoil and a deepening debt crisis in Europe are increasing pressure on Asian nations to support growth as exports falter from Taiwan to Malaysia. China cut banks' reserve requirements on Saturday to revive demand.
Policy dilemma
"The Reserve Bank of India faces somewhat of a dilemma," Robert Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse Group, said in a note after the report. "Our guess is that the chance of a June rate move has diminished."
The BSE India Sensitive Index fell 0.7 per cent in midafternoon in Mumbai, heading for the longest losing streak this year as State Bank of India and ICICI Bank, the nation's two biggest lenders, erased advances of more than 2 per cent each.
The yield on the 8.79 per cent note due November 2021 rose two basis points immediately after the inflation data, before sliding five basis points, or 0.05 percentage point, to 8.52 per cent.
The central bank lowered the repurchase rate on April 17 for the first time since 2009, by 50 basis points to 8 per cent. A report last week showed Indian industrial production unexpectedly contracted in March as weaker domestic demand and tumbling exports hurt the economy.
"The inflation numbers are a very uncomfortable statistic," Chakravarthy Rangarajan, chairman of the Prime Minister's Economic Advisory Council, said in New Delhi yesterday.
"Many people have been calling for an easing in monetary policy but it makes it difficult for RBI to moderate policy. It is not a good sign," he said.
Concern India's outlook has worsened because of trade and fiscal deficits, political gridlock, elevated inflation and faltering global growth has pushed the nation's currency toward a record low. That prompted the central bank to say last week exporters must convert half their foreign-currency earnings into rupees as it stepped up efforts to check the decline.
The currency weakened 0.5 per cent to 53.885 per dollar in Mumbai. It is down almost 17 per cent in the past year, the worst performer in a basket of 11 most-traded Asian currencies tracked by Bloomberg.
Governor Subbarao's 13 interest-rate increases in the last two years helped tame price pressures in a nation where 75 per cent of the people live on less than $2 a day. The wholesale- price inflation gauge has fallen below 9 per cent this year, after breaching that level most of last year.
Aside from cutting the benchmark rate, the central bank has also reduced the amount of deposits lenders must set aside as reserves twice this year by a combined 125 basis points, to 4.75 per cent, to ease cash shortages in the banking system.
Credit Suisse predicts India will cut its repurchase rate by another 125 basis points by March next year, Prior-Wandesforde said yesterday.
Still, the central bank's scope to cut interest rates further to boost growth is constrained by the threat of price increases, Ashima Goyal, a member of the bank's technical advisory committee, said in an interview in Mumbai last week.
Bric comparison
While the wholesale price gauge has cooled after the Reserve Bank raised rates by a record 3.75 percentage points from mid-March 2010 to October last year, India still has the highest inflation in the so-called Bric group of biggest emerging markets that also includes Brazil, Russia and China.
"The inflation number underscores that the room to ease monetary policy is quite limited because there are still upside risks to inflation," said Leif Eskesen, Singapore-based chief economist for India and Southeast Asia at HSBC Holdings.
Asia's third-largest economy probably expanded 6.9 per cent in the 12 months through March 2012, the least in three years, government estimates show. Standard & Poor's cut India's credit outlook to negative from stable last month, putting at risk its investment grade status.
