Soaring fuel prices pushed India’s inflation rate to a 13-year high in early June, sharply exceeding expectations and prompting the government to signal further tough action ahead on monetary policy.
Inflation reached 11.05 per cent in the 12 months ended June 7, up from 8.75 per cent the previous week and well above the 9.82 per cent median forecast in a Reuters poll of analysts.
“This is indeed a very difficult time and we will have to take stronger measures both on the demand side and monetary side,” Palaniappan Chidambaram, finance minister, warned.
India’s latest figure for annual inflation is now double the “comfort level” set by the central bank, the Reserve Bank of India, of below 5.5 per cent.
With elections expected before next May, India’s Congress party-led ruling coalition needs to bring inflation under control by tightening its fiscal and monetary policy. But doing so could hurt its record for delivering economic growth.
Tushar Poddar, economist with Goldman Sachs in Mumbai, said that if double-digit inflation continued, it could become entrenched in consumer expectations, making it difficult to eradicate.
“Due to the social implications, we believe it will increasingly become a major political issue,” Mr Poddar said.
The surprise figures in India come against a backdrop of soaring inflation in Asia on rising oil and commodity prices.
China on Friday increased retail fuel prices by up to 18 per cent and jet fuel by 25 per cent, a move that is expected to add up to 90 basis points to its inflation rate. Inflation in China eased to 7.7 per cent in April after hitting a near 12-year high in February.
Even Asia’s developed economies are struggling with their highest levels of inflation in years – economists expect Singapore’s May inflation to hit another 26-year high of 7.7 per cent against a year earlier, up from 7.5 per cent in April, which was the biggest gain since March 1982.
The latest rise in inflation in India was mainly due to an increase in retail fuel prices by an average of 10 per cent to try to reduce government subsidies that are costing around 3 per cent of gross domestic product.
Economists had expected fuel to contribute about 60 basis points to inflation but the actual impact was double this amount.
“It’s a big surprise – we were expecting 10 per cent plus but this has beaten that,” said Sonal Varma, economist with Lehman Brothers in Mumbai.
Concern over inflation has this month led the Reserve Bank of India to increase its key lending rate by 25 basis points to 8 per cent.
But Ms Varma said the RBI would probably now bring forward its next interest rate rise to July 29 – the date of its scheduled policy meeting rather than later in the quarter.
Lehman was anticipating another 25 basis point rise in the key lending rate and a 100 basis point increase in the cash reserve ratio, the amount of funds banks have to deposit with the RBI, which currently stands at 100 basis points.
After the release of the inflation data India’s benchmark Bombay Stock Exchange Sensex index fell 3.3 per cent to 14,590.16 points.
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