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.