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 percent from a
year earlier, after climbing 6.89 percent in March, the Ministry of Commerce
and Industry said in a statement in New Delhi today. The median of 32 estimates
in a Bloomberg News survey was for a 6.67 percent gain.
Reserve Bank of India Governor Duvvuri Subbarao signaled
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 May 12 to revive demand.
“The Reserve Bank of India faces somewhat of a dilemma,” Robert
Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse
Group AG, said in a note after the report. “Our guess is that the chance of a
June rate move has diminished.”
Sensex Falls
The BSE India Sensitive Index (SENSEX) fell 0.7 percent as
of 2:22 p.m. in Mumbai, heading for the longest losing streak this year as State
Bank of India and ICICI Bank Ltd. (ICICIBC), the nation’s two biggest lenders,
erased advances of more than 2 percent each.
The yield on the 8.79 percent 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 percent.
The central bank lowered the repurchase rate on April 17 for
the first time since 2009, by 50 basis points to 8 percent. 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 today. “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.”
Worst Performer
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 percent to 53.885 per dollar in
Mumbai. It is down almost 17 percent 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 percent of the
people live on less than $2 a day. The wholesale- price inflation gauge has
fallen below 9 percent in 2012, 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 percent, to ease cash
shortages in the banking system.
Fastest Inflation
Credit Suisse predicts India will cut its repurchase rate by
another 125 basis points by March 2013, Prior-Wandesforde said today.
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.
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 Plc. “There isn’t a lot of spare capacity in the economy
because growth has slowed on the back of policy paralysis, lack of structural
reforms and therefore it makes inflation a structural problem rather than a
cyclical one.”
Maruti Profits
Maruti Suzuki India Ltd., the nation’s biggest carmaker,
posted a 3 percent decline in fourth-quarter profit because of high raw
material costs and discounts on some models.
The country imports 80 percent of its annual crude
requirements and the government compensates state oil firms for selling
products below market prices.
Asia’s third-largest economy probably expanded 6.9 percent
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.
Source: http://www.bloomberg.com/news/2012-05-14/india-inflation-unexpectedly-accelerates-curbing-rate-cut-scope.html
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