India's inflation accelerated in May, topping market estimates and adding to pressure on the central bank to tighten monetary policy later this week.
The wholesale price index rose 9.06% in May from a year earlier, quicker than the provisional 8.66% increase in April, as prices of fruit and some non-food articles shot up.
The reading was above market expectations. The median estimate in a poll of 15 economists was for an increase of 8.7%.
The government also revised up March's inflation reading to 9.68%, from a provisional 9.04%.
Government bonds extended losses following the data. The most-traded 7.80% bond due in 2021 fell to 96.55 rupees ($2.16) from 96.68 rupees before the announcement.
The price pressures will likely prompt the Reserve Bank of India to raise its lending rate for the 10th time since March 2010 when it meets to review monetary policy Thursday.
Anubhuti Sahay, an economist with Standard Chartered Bank, said the May reading is significantly higher than anticipated, especially at a time when global commodity prices are cooling. "The inflation print has been around 9% this time as well, even without diesel prices being raised," she said. "This clearly validates further monetary tightening by the RBI."
However, a recent cooling in the economy means the RBI probably won't move as aggressively as it did at its May 3 review, when it surprised economists by raising the repo rate by 0.50 percentage point.
Most economists expect the RBI to raise the policy rate by 0.5-1.0 percentage point by next March, including a 0.25 percentage point increase Thursday.
Data last week showed industrial activity slowing as the past year's monetary tightening crimped investment.
Industrial output grew just 4.4% year-on-year in April, down from 7.3% in March. Judged on a new index just launched by the government, output grew 6.3% on-year.
Inflation in Asia's third-largest economy has been an open wound for the government, which is facing public and political criticism for failing to rein in prices for more than two years now.
What started as mainly food-led inflation has spread to the wider commodity basket, leading to sustained pressure on overall prices.
Tuesday's data show prices of non-food articles rose 22% in May from a year earlier, driven by a 59% rise in prices of fibers. However, prices of non-food articles were down 4.4% from April.
Food prices rose more than 8% year-on-year in May as fruit prices shot up 32%.
Economists say there's little relief in sight until September, when farm output following seasonal rains should improve market supply.
However, high crude oil prices, which are pressuring the federal government to raise retail prices of subsidized fuels, could drive inflation.
A government panel will meet soon to consider a hike in prices of diesel and cooking fuels to help oil retailers cut their revenue losses from selling at discounted, state-set prices.
Data also show the index of manufactured products, which constitutes about 65% of the inflation basket, rose 1.03% in May compared with the previous month, and 7.27% compared with a year earlier.
Source: wall street Journal
Vivek Agrawal
Summer Intern-Fundamental Analysis
DENIP Consultants Pvt. Ltd.
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