India's annual inflation rate topped 5 percent in early June, accelerating to its highest level in more than a year, data showed on Friday, bolstering chances of an increase in official interest rates in July.
Government data showed the annual inflation rate for the week of June 10, based on wholesale prices, was 5.24 percent compared to 4.72 percent a week earlier, due to an increase in the cost of fuel, food and manufactured products. The reading was the highest since May last year. At the end of the corresponding week last June, the rate was 4.50 percent.
The sign of accelerating inflation came a day after the government allowed private players to import wheat, pulses and sugar under easier terms to contain prices of food items that have shot up in the past few weeks.
Finance Minister Palaniappan Chidambaram said the government would take further steps if needed to contain inflation.
"Monetary measures have been taken. Some fiscal steps have been taken and some action has been taken on the import side," he told reporters. "I am confident that these steps will moderate inflation. If necessary we will take further steps."
Analysts had expected the latest data to show annual wholesale price inflation at 5.02 percent but the higher than expected rate sent federal bond yields to new four-year highs.
The yield on the benchmark 10-year Indian bond> rose six basis points to hit 8.19 percent, its highest since May 2002, as investors priced in more interest rate increases in India and the United States. "We expect the inflationary pressures to continue to build up," said Shubhada Rao, chief economist at YES Bank in Mumbai.
"Looking at the global cues and the domestic inflation we expect the interest rates to harden, and a 25-basis-point increase is on the cards in the July review."
Speaking in the southern city of Bangalore, Chidambaram said no developing country can avoid inflation and high economic growth sometimes leads to an increase in inflation.
"I assure you that we will not spare any steps to tame inflation, and we will tame inflation," Chidambaram told the centenary celebrations of a state-run bank.
The latest inflation data included a 9.2 percent increase in petrol prices and a 6.6 percent rise in diesel prices, made on June 5 as the government tried to ease losses at state-run refiners due to soaring crude oil costs.
Economists had expected the increase in retail fuel prices to add 0.35 percentage points to the reading, while some saw the inflation rate topping 5.5 percent within months as the second-round impact was felt in the economy.
On June 8 the Reserve Bank of India raised the benchmark short-term reverse repo rate by 25 basis points to 5.75 percent in a surprise move that analysts said was primarily aimed at controlling inflation after the fuel price rise.
It was the second quarter-point increase this year, taking the rate to its highest since June 2002. The central bank is scheduled to review policy again on July 25.
Some analysts expect the central bank to raise the cash reserve ratio (CRR) from 5.0 percent to rein in surplus funds and curb inflation expectations. The CRR is the percentage of deposits that banks have to keep as cash with the central bank.
"The rise in oil prices has come with a lag and could last for a longer period," said Madan Sabnavis, chief economist at National Commodity & Derivatives Exchange, Mumbai. "There would be pressure on the Reserve Bank of India to raise interest rates."
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