India is bracing for a possible round of interest rate rises after the government on Friday released figures showing inflation had surged to fresh highs.
The wholesale prices index reached 8.24 per cent in the 12 months to May 24, its highest level since August, 2004, and was on track to breach 9 per cent after the government this week increased heavily subsidised fuel prices.
The latest inflation figure increases the pressure on the Congress party-led government, which is facing protests in several Indian cities over the fuel price rises and a revolt from some states against the move.
“The Reserve Bank of India really needs to raise rates,” said Tushar Poddar, economist with Goldman Sachs in Mumbai.
He said India’s benchmark rate, at 7.75 per cent, was negative in real terms, a pattern that was becoming more common across Asia as inflation increased on the back of rising fuel and food prices.
The RBI’s next scheduled meeting on interest rates is not due until late July but it could act earlier, economists said.
This week Indonesia raised interest rates and the Philippines was expected to follow.
In China, consumer price inflation for May, which the government will announce next week, is expected to have eased from April’s 8.5 per cent.
Several economists predict the level will fall below 8 per cent because of recent declines in the cost of food, but rising energy and raw material prices could lead to a new round of inflationary pressures.
In India there is concern that the government’s fuel price rises of between 8 and 17 per cent could push inflation to a 13-year high of about 9.2 per cent. Manmohan Singh, prime minister, this week responded by calling on civil servants to cut down expenses, especially overseas travel, to conserve fuel and reduce the government’s ballooning budget deficit.
But he faced a rebellion against the fuel price rises from state governments, especially those facing elections this year.
The government for the national capital’s region, which includes Delhi, yesterday increased the price of liquefied petroleum gas, a politically sensitive fuel used for cooking, by just Rs10 (23 US cents), or about 3 per cent. The central government had planned to increase LPG prices by Rs50 but the Delhi government stepped in and softened the blow with its own subsidy.
The measure will cost Delhi up to $43m (€28m, £22m) in a direct subsidy to oil companies.
The states of Tamil Nadu, Bihar, West Bengal and Maharashtra, home to Mumbai, cut sales tax on petrol and diesel to cushion the shock at the pump.
Strikes protesting against the fuel price rises raged yesterday in Communist-ruled West Bengal state.