Indian inflation shot above 11 per cent in early June to a 13-yearhigh following a rise in state-set fuel prices, rattling markets andprompting the finance minister to warn of stronger anti-inflationmeasures ahead.
Inflation is on the rise globally and has also reached double digitsin other countries, including Indonesia, Vietnam, Sri Lanka andPakistan as oil, food and other commodity prices soar.
What experts say about inflation Inflation rate surges to 13-yr highat 11.05%
India government bond yields jumped to their highest in nearly sevenyears after Friday's data and the finance minister's warning, whileshares fell to their lowest levels in 2008 on concern that interestrates will move up.
Traders said the central bank, which raised rates just last week,stepped in to support the weakening rupee after the release of India'swholesale price index (WPI), the country's most widely watchedinflation measure.
The index showed annual inflation jumped to 11.05 per cent in the 12months to June 7, its hottest pace since May 1995 and much higher thanforecasts for 9.82 per cent.
It also marked a big jump from 8.75 per cent in the week-earlierdata.
"The number is quite intimidating and it will require some responsefrom the fiscal authorities and the Reserve Bank of India," saidAbheek Barua, chief economist at HDFC Bank.
"So I wouldn't be surprised if there is another monetary measure onits way in the next fortnight or so, and this is likely to be a reporate hike of about 25 basis points."
The double-digit inflation figure -- inflamed by a fuel price hike ofabout 10 per cent early this month when India cut subsidies, will alsoheap more pressure on a ruling coalition, which faces state andnational elections in coming months.
The coalition is already struggling to unify behind a controversialnuclear energy deal with the United States.
The central bank surprised financial markets last week by raisinginterest rates, its first increase in more than a year. It boosted itsrepo rate by 25 basis points to 8 per cent.
Economists said with inflation running significantly higher thananticipated, another increase was likely.
Reflecting such expectations, the benchmark 10-year government bondyield jumped 10 basis points to 8.64 per cent, while the benchmarkstock index was down just over 3 per cent in mid-afternoon.
Political fallout
Political worries have already rattled markets this week, fuellinglosses on Wednesday and Thursday, while surging food bills havecontributed to a string of defeats for the ruling Congress party atstate elections over the last few months.
Now the coalition's communist allies have renewed threats to withdrawsupport for the government over the nuclear deal. The government hasjust a week or so to decide if it wants to risk early polls -- atwhich rising prices will be a key battleground -- by going ahead withthe agreement.
Earlier this month, India joined a stable of Asian countries no longerable to afford big fuel subsidies in the face of rising prices,sparking street protests and calls for industrial strikes.
Where to next?
India's inflation rate was last this high in the week of May 6, 1995,when it stood at 11.11 per cent. In the latest figures, inflation forthe week of April 12 was revised up to 7.95 per cent from 7.33 percent.
Energy costs account for 14.2 per cent of the WPI index and Friday'sdata showed the index for fuel, power, light and lubricants rose 7.8per cent in the week of the price rise.
Finance Minister Palaniappan Chidambaram promised action.
"This is indeed a very difficult time and we will have to takestronger measures both on the demand side and monetary side," he toldreporters.
Food prices have been a source of concern for the Congress party-ledcoalition as these impact the poor the hardest, but the food articlesindex fell 1.1 per cent in the June 7 data.
Nonetheless, Indranil Pan, chief economist at Kotak Mahindra Bank,said inflation could go towards 12 per cent. "The next 3 to 5 monthsare going to be very crucial."
Robert Prior-Wandesforde, economist at HSBC in Singapore, saw both therepo rate and the cash reserve ratio (CRR), used by the central bankto drain surplus cash from the money market, rising by 50 and 75 basispoints respectively by year-end.
Inflation is on the rise globally and has also reached double digitsin other countries, including Indonesia, Vietnam, Sri Lanka andPakistan as oil, food and other commodity prices soar.
What experts say about inflation Inflation rate surges to 13-yr highat 11.05%
India government bond yields jumped to their highest in nearly sevenyears after Friday's data and the finance minister's warning, whileshares fell to their lowest levels in 2008 on concern that interestrates will move up.
Traders said the central bank, which raised rates just last week,stepped in to support the weakening rupee after the release of India'swholesale price index (WPI), the country's most widely watchedinflation measure.
The index showed annual inflation jumped to 11.05 per cent in the 12months to June 7, its hottest pace since May 1995 and much higher thanforecasts for 9.82 per cent.
It also marked a big jump from 8.75 per cent in the week-earlierdata.
"The number is quite intimidating and it will require some responsefrom the fiscal authorities and the Reserve Bank of India," saidAbheek Barua, chief economist at HDFC Bank.
"So I wouldn't be surprised if there is another monetary measure onits way in the next fortnight or so, and this is likely to be a reporate hike of about 25 basis points."
The double-digit inflation figure -- inflamed by a fuel price hike ofabout 10 per cent early this month when India cut subsidies, will alsoheap more pressure on a ruling coalition, which faces state andnational elections in coming months.
The coalition is already struggling to unify behind a controversialnuclear energy deal with the United States.
The central bank surprised financial markets last week by raisinginterest rates, its first increase in more than a year. It boosted itsrepo rate by 25 basis points to 8 per cent.
Economists said with inflation running significantly higher thananticipated, another increase was likely.
Reflecting such expectations, the benchmark 10-year government bondyield jumped 10 basis points to 8.64 per cent, while the benchmarkstock index was down just over 3 per cent in mid-afternoon.
Political fallout
Political worries have already rattled markets this week, fuellinglosses on Wednesday and Thursday, while surging food bills havecontributed to a string of defeats for the ruling Congress party atstate elections over the last few months.
Now the coalition's communist allies have renewed threats to withdrawsupport for the government over the nuclear deal. The government hasjust a week or so to decide if it wants to risk early polls -- atwhich rising prices will be a key battleground -- by going ahead withthe agreement.
Earlier this month, India joined a stable of Asian countries no longerable to afford big fuel subsidies in the face of rising prices,sparking street protests and calls for industrial strikes.
Where to next?
India's inflation rate was last this high in the week of May 6, 1995,when it stood at 11.11 per cent. In the latest figures, inflation forthe week of April 12 was revised up to 7.95 per cent from 7.33 percent.
Energy costs account for 14.2 per cent of the WPI index and Friday'sdata showed the index for fuel, power, light and lubricants rose 7.8per cent in the week of the price rise.
Finance Minister Palaniappan Chidambaram promised action.
"This is indeed a very difficult time and we will have to takestronger measures both on the demand side and monetary side," he toldreporters.
Food prices have been a source of concern for the Congress party-ledcoalition as these impact the poor the hardest, but the food articlesindex fell 1.1 per cent in the June 7 data.
Nonetheless, Indranil Pan, chief economist at Kotak Mahindra Bank,said inflation could go towards 12 per cent. "The next 3 to 5 monthsare going to be very crucial."
Robert Prior-Wandesforde, economist at HSBC in Singapore, saw both therepo rate and the cash reserve ratio (CRR), used by the central bankto drain surplus cash from the money market, rising by 50 and 75 basispoints respectively by year-end.
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