Indian Inflation Gathers Pace as Weak Monsoon Spurs Food Prices

India's wholesale prices rose the most since May as the weakest monsoon rain in almost four decades caused shortages and pushed up costs of vegetables, lentils and other food products.

The benchmark wholesale-price index climbed 0.92 percent in the week to Oct. 3 from a year earlier, after gaining 0.7 percent in the previous week, the Commerce Ministry said in New Delhi today. Economists expected a 1.46 percent increase.

Governor Duvvuri Subbarao, who says India may need to act before developed economies to curb "incipient" inflationary pressures, next reviews the central bank's monetary policy on Oct. 27. The Reserve Bank of India may decide to mop up money from the financial system rather than raise interest rates, according to Chakravarthy Rangarajan, an economic adviser to Prime Minister Manmohan Singh.

"Food inflation is bound to push inflation above the Reserve Bank's comfort zone," said Samiran Chakraborty, an economist at Standard Chartered Bank in Mumbai. Subbarao faces "the classic central banker's dilemma of having to balance uncertain growth with rising inflation," he said.

Wholesale-price inflation may accelerate to as much as 7 percent in the year to March 2010, more than the central bank's 5 percent target, Chakraborty said. The Reserve Bank may also revise its inflation target later this month.

Price pressures are resurfacing across Asia due to a surge in commodities, forcing policy makers to start thinking about increasing borrowing costs after cutting them to record lows to counter the global recession.

Interest Rates

The Reserve Bank of India lowered policy interest rates six times from October 2008 to April 2009 and slashed statutory cash requirements for lenders, which together provided money worth 9 percent of the economy to the financial system. In the last monetary policy announcement on July 28, the central bank left the reverse-repurchase rate unchanged at 3.25 percent and kept the repurchase rate at 4.75 percent.

"If liquidity in the system is very large, then it has an impact on prices," Rangarajan said. "If inflationary pressures are very strong because of food prices or due to other factors, then liquidity will have to be brought down."

India's wholesale prices rose for the fifth straight week after declining for three months, and consumer-price inflation is already running above 10 percent.

Consumer prices paid by farm workers jumped 12.89 percent in August from a year earlier. Inflation for rural workers was 12.67 percent and consumer prices paid by industrial workers climbed 11.72 percent.

India's wholesale-price index published today may be revised in two months, after the government receives additional data. The ministry revised the rate for the week ended Aug. 8 to a drop of 0.37 percent from a decline of 1.53 percent.