Indian inflation hits two-year high of 7.51%

Indian inflation hits two-year high of 7.51%

Biman Mukherji, Agence France-Presse, Bombay, India

India's inflation rate hit its highest level in two years,
climbing to 7.51 percent, driven mainly by rocketting food prices
triggered by a dry spell in key food-growing regions.

The wholesale price index, India's most closely tracked
inflation gauge, rose by close to a percentage point for the week
ended on July 24 from the previous week's 6.52 percent, a much
bigger increase than expected by economists.

They said the rise could lead to a hardening of official
interest rates, now at three-decade lows, which could slow growth
in Asia's third-largest economy.

"Everyone was anticipating a rise but not such a huge one.
This will harden interest rates," said D.H. Pai Panandikar,
economist at the RPG group, a New Delhi-based think-tank.

Stocks, already lower in line with weaker global markets, fell
further on the data. The Bombay Stock Exchange's benchmark top-30
Sensex share index was down 1.18 percent or 61.85 points at
5,190.93 in afternoon trade. Bond prices were also hit as yields
jumped in expectation of rate hikes.

The inflation rise came as a setback for the new leftist-
backed Congress government which took power in May, already
facing expected weaker economic growth as a result of delayed
monsoon rains in the farm-dependent nation.

The government, which came to power on a pledge of improving
the lot of India's poverty-stricken millions, is well aware
inflation can be a political landmine.

In 1998, soaring prices of onions, an Indian cooking staple,
resulted in the Hindu nationalist Bharatiya Janata Party losing
office in the state of Delhi.

At the same time, many pensioners and other Indians depend on
fixed-income securities and bank saving rates, which now stand
considerably below the inflation rate at 3 to 5 percent.

Analysts said inflation was likely to climb higher in coming
weeks as government figures were yet to include the impact of
higher international fuel prices on the domestic market.

"The upcoming data will have to incorporate the fuel price
hike," said Dhananjay Sinha, ICICI Bank chief economist.

India imports nearly 70 percent of its oil needs and
volatility in the global oil market has a strong effect on prices
in the domestic market.

Economists also noted there was no sign of agricultural and
other commodity prices falling despite the government
expectations based on a late revival of the annual monsoon that
is crucial for the farming sector.

The rains were delayed over the main food-growing regions in
India's north, which sparked a rise in food prices in
anticipation of a fall in crop output.

"(Also) the steel sector is talking about further increase in
prices. The demand for commodities is pretty strong," Sinha said.

Economists said they were hopeful inflation would peak by the
second quarter of the fiscal year to March 2005 and did not
expect it to touch the double-digit mark which last happened in
the mid-1990s, but even the present level would pose problems.