INFLATION IN INDIA

INDIA INFLATION UNEXPECTEDLY QUICKENS, CURBING RATE-CUT ROOM

Unni Krishnan

Bloomberg, May 14, 2012

Indian inflation unexpectedly accelerated in April, crimping the central bank’s scope to extend interest-rate cuts and bolster economic growth.

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. Pressure on Asian nations to support growth has resurged as Greece’s political turmoil threatens to deepen the European debt crisis and exports falter from Taiwan to Malaysia, prompting China to cut banks’ reserve requirements on May 12.

“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.”

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.

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