Markets down on high inflation rate report

Markets down on high inflation rate report

Indian inflation soars to 3-1/2-year high

Indian inflation spiked to a 3-1/2-year high last month, partly on rising minerals prices, leading to more worries in the debt and equity markets on Friday about a near-term interest rate hike.

Government data showed inflation, as measured by the wholesale price index, was 7.51 percent in the year to July 24, up from 6.52 percent a week before and way above the median in a recent Reuters poll of 6.70 percent.

Indian inflation has not been this high since February 2001.

"More than 7 percent is really something to be worried about," said T.K. Bhaumik, senior adviser on policy at the Confederation of Indian Industry.

"The government will have to rethink the small savings interest rate as high inflation is increasing the economic insecurity of people -- particularly pensioners and those dependent on fixed-income securities for their livelihood."

The data showed the minerals index rose by 107 percent to 304.2 from 146.9 in the previous week due to higher iron ore prices, which rose 189 percent.

But India's chief economic adviser, Ashok Lahiri, remained optimistic that inflationary pressures would recede in the next few weeks due to a pick-up in monsoon rains.

"We expect inflation to come down by the middle of August. The arrival of monsoon will also help," he told reporters.

In farm-dependant India, a good monsoon helps to boost agricultural output and contain food prices.

A government statement said inflation would be under pressure in the short-term, but was expected to decline due to the arrival of monsoon rains and an "appropriate mix of government policies", though it did not elaborate on the policies.

Lahiri said higher inflation for the week ended July 24 was due to a rise in world commodity prices and a statistical effect.

He explained that last year, the index was stable until August 21, when it started rising. So from mid-August, the higher comparable figure would put downward pressure on this year's inflation, he added.

BONDS, SHARES DOWN

Federal bonds fell on worries that the central bank may be forced to tighten monetary policy to curb inflationary pressures in Asia's fourth-largest economy, while shares declined on worries that a possible rise in rates could choke off demand.

The benchmark 10-year bond yield jumped to close at 6.2750 percent, up from 6.1169 percent before the inflation data was released. The Bombay Stock Exchange top-30 share index shed 1.06 percent to close at 5,196.99 points.

Inflation has been steadily picking up pace in recent months because of rising fuel and commodity prices, which have tracked global trends and raised input costs for manufacturers. Analysts say those rising costs could soon be passed on to consumers.

"What this suggests is that inflationary pressures in the economy cannot be taken lightly and further reinforces the view that there will be a 50-basis-point repo rate hike by February," said Sanjeet Singh, economist at ICICI Securities.

"The inflation reading is likely to touch 8 percent in the near term as higher oil and petrochemical prices get factored."

India's bank rate, used to price loans, is at a three-decade low of 6 percent, while the short-term repo rate is 4.5 percent.

Economists in India track the wholesale price inflation data because it has a large basket of goods and information is readily available. The government uses the WPI data for adjustments to salaries and allowances.

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Inflation inches up to 7.61%

The inflation rate inched up to 7.61% for the week ended July 31 on top of the previous week’s sudden spurt in inflation to 7.51%. Since petrol and diesel prices were hiked from the midnight of July 31, the inflation rate for the week does not show the effect. Analysts expect a further increase in the inflation rate for the August 1-7 week when the wholesale price index reflects an increase in the prices of fuel and lubricants.

Finance minister P Chidambaram promised on Tuesday (both fiscal and monetary steps) to fight inflation, but these measures have not yet been initiated. The Reserve Bank of India (RBI) announced on Friday its decision to resume oneday repos (repurchase options) at a fixed rate of 4.5%. But money market operators view this essentially as a measure aimed at meeting temporary liquidity mismatch in the market rather than a step meant to soak up excess money supply in the system as a whole.

The government remains optimistic about the inflation rate declining from the middle of August, primarily as a result of a statistical effect. The sudden spurt in inflation to a three-and-a-half-year high of 7.51% for the week ended July 24 has been attributed to the fact that around the same time last year, there was a sudden dip in the inflation rate. Even the rate for the week ended July 31 at 7.61% could be partly explained by the “low base’’ phenomenon. In the comparable week last year— ended August 2, 2003—the inflation rate was less than 4% at 3.96%.

The inflation rate moved up from mid-August last year, and this factor is expected to bring down the rate from mid-August this year.

Inflation hits new three-and-a-half year high at 7.96 pct

India's annual wholesale price inflation surged to a new 3-½ year high of 7.96 percent in the week ended August 7 due to higher energy and manufactured product prices.

Data released by the Commerce and Industry Ministry on Friday said inflation had risen from 7.61 percent in the previous week and the rate stood at 3.89 percent in the week ended August 9, 2003.

The latest rate is the highest since it touched 8.49 percent in the year to February 17, 2001.

The government also revised the wholesale price inflation figure for the week ended June 12 to 6.58 percent from the earlier 5.89 percent.

The rise was mainly due to a 1.5 percent increase in the energy index to 278.5 due to higher prices of aviation turbine fuel, diesel and petrol following a surge in global crude prices.

Manufactured products, accounting for nearly 64 percent of the inflation index, rose 0.1 percent in the week to August 7, led by higher food prices. The primary articles index rose 0.1 percent due to increased prices of fruit, vegetables and poultry.

Stock markets, which fell by more than 1 percent on Friday, as soaring global oil prices and surging inflation in Asia's fourth-biggest economy raised fears of an increase in domestic interest rates, brokers said.

The 30-issue Bombay share index closed down 1.15 percent at 5,064.66 points, falling 0.75 percent on the week and taking losses over the past two weeks to 2.5 percent.

The marker is down 13.2 percent this year, making it Asia's worst performer.

Debt and currency markets were shut on Friday for a local holiday.

Analysts fear inflation will cross 8 percent in the coming weeks on the back of rising global oil prices, which are nearing $49 per barrel, and an expected dip in farm output due to delayed rains.

But India's chief economic adviser said he expects a government decision to cut duties on petrol and diesel and a revival in monsoon rains to help rein in inflation. The government has said it could take more fiscal measures if necessary to control prices.

"We are keeping a close watch. There is no reason for any wild expectations on inflation," Ashok Lahiri told reporters.

In farm-dependent India, a good monsoon helps to boost agricultural output and contain food prices.

India imports 70 percent of its crude oil requirement and any rise in global oil prices hurts Asia's fourth-largest economy.

India's bank rate, used to price loans, is at a three-decade low of 6 percent, while the short-term repo rate is 4.5 percent.

Inflation has been steadily picking up pace in recent months because of rising fuel and commodity prices, which have tracked global trends and raised input costs for manufacturers. Analysts say those rising costs could soon be passed on to consumers.

Economists track wholesale price inflation data because it has a large basket of goods and readily available information. The government uses the WPI data for adjusting salaries and allowances.

The government expects gross domestic product growth of close to 7 percent this year, but analysts expect the economy to expand at a slower pace due to the delayed monsoon.