Mumbai: Inflation in India accelerated to a whisker away from a double-digit rate in February on rising food prices, increasing the likelihood that the central bank will hike interest rates at its next monetary policy meeting in April.
The benchmark wholesale price index-based inflation rate rose to 9.89 percent on year, its fastest pace in 16 months, from a provisional 8.56 percent in January, the Ministry of Commerce and Industry said Monday.
Inflation was also well above a 8.5 percent rate that the Reserve Bank of India has forecast by the end of March, highlighting the sharp upswing in prices as food prices pick up and India's economic recovery gathers steam.
It followed data Friday showing industrial output surged in January, a sign the economy is in a strong recovery, with growth possibly set to top a 7.2 percent expansion that the government forecasts for this fiscal year ending March 31.
The large rise in the WPI partly reflected a comparison with depressed levels a year earlier. But prices of food, which accounts for a large weighting in the index, have been surging, after the weakest monsoon in 37 years hurt farm output.
A combination of growing concern about inflation and growing confidence in the resilience of the economic recovery will likely compel the RBI to increase interest rates when it next meets in April to review the monetary policy. That would make India the latest central bank in Asia to roll back some of the monetary stimulus that helped the region's economy cope with the global financial crisis.
A. Prasanna, economist at ICICI Securities Primary Dealership, said inflation was increasingly being driven by rise in prices of manufactured goods rather than primary articles, showing a shift to demand-driven inflation.
"The RBI needs to act soon, probably in March, given that we are now seeing inflation shifting to a demand-driven one," Prasanna said. "But given that they have ruled out inter-policy action, I expect a 50 basis points rate hike in the April policy," he added.
Prasanna expects the inflation rate to hit double digits and peak out in March.
The February index for primary articles was up 15.54 percent from a year earlier to 284.7, while the fuel index rose 10.19 percent to 356.9. The food articles index was at 286.1, up 17.79 percent led by prices of pulses, which were up 35.58 percent on year, and potatoes, which rose 29.65 percent. The manufactured products index was at 214.3, up 7.42 percent from a year earlier.
At the Jan. 29 policy review meeting, the RBI raised banks' cash reserve ratio, or the amount of cash they must set aside against deposits, by 75 basis points to drain excess liquidity that could fuel inflation. But it kept its key interest rates unchanged, awaiting a broad-based pickup in the economy.
Bureau Report
First Published: Monday, March 15, 2010, 13:40