Published September 16, 2013
NEW DELHI (AFP) – India's inflation surged to a six-month high in August, data showed Monday, strengthening chances the new central bank governor will freeze interest rates despite a struggling economy.
Inflation, as measured by the Wholesale Price Index, hit 6.10 percent in August from a year earlier and was up from 5.79 percent in July.
"Rising wholesale price inflation will take rate cuts off the agenda until well into next year," said Capital Economics economist Daniel Martin.
The data comes as former International Monetary Fund chief economist Raghuram Rajan, famed for forecasting the 2008 global financial meltdown, prepares to chair his first monetary policy-setting meeting on Friday.
India's once-booming economy is caught in a quagmire of sharply slowing growth, stubbornly high inflation and a record current account deficit that has pushed the rupee sharply lower.
Rajan has already declared he sees his main role as sustaining "low and stable expectations of inflation" and analysts said he could not ignore the latest price data.
They said the impact of the rupee's sharp fall on the price of fuel, most of which is imported, and other commodities would also soon start showing up in the inflation figures.
The August data surprised markets which expected the figure to be in line with July's.
The inflation increase was driven mainly by food price rises due to crop damage caused by monsoon flooding.
Onion prices, a dietary staple especially for the poor masses, soared a massive 245 percent from a year earlier while the cost of fruit, eggs and other goods also climbed.
The scandal-scarred government of Premier Manmohan Singh has been anxious to tame inflation -- especially of food -- and revive the economy as it seeks re-election in polls due by May 2014.
But the weak rupee and inflation have curbed the bank's room to cut rates to stimulate an economy which grew last year at five percent, its slowest pace in a decade.
The central bank cut rates in early 2013 but was forced to tighten monetary policy again to try to stem the rupee's fall.
While still down around 12 percent this year against the dollar, the rupee has rallied following measures announced by Rajan to liberalise financial markets to spur foreign fund inflows and bolster the currency.
The rupee was at a four-week high of 62.58 against the dollar Monday.
Business leaders have been clamouring for lower rates to lift the economy.
But economists say rate cuts now could undermine the rupee and widen a record current account deficit, the broadest measure of trade, which the central bank calls the "biggest risk" to India's economy.
"Anything suggesting wanting to remove these measures would risk undermining the rupee once again," said Credit Suisse India economist Robert Prior-Wandesforde.