India's Inflation Accelerates to Fastest Since 1995

India's inflation accelerated to the fastest pace since 1995, vindicating the central bank's decision to raise borrowing costs for the third time in two months.

Wholesale prices rose 11.98 percent in the week to July 19, after gaining 11.89 percent in the previous week, the commerce ministry said in New Delhi today. Economists had expected a 12.03 percent increase.

Governor Yaga Venugopal Reddy this week raised the central bank's repurchase rate by a half-percentage point to 9 percent, sacrificing growth to tame runaway inflation. The Reserve Bank of India may increase the benchmark rate again in the next three months, according to economists in a Bloomberg News survey.

``The message is clear that inflation will dominate over growth,'' said Sonal Varma, a Mumbai-based economist at Lehman Brothers Inc. ``We expect growth to slow to 7.3 percent this fiscal year due to rising headwinds from sharp rate increases, rising commodity prices and slackening foreign demand.''

Reddy, due to retire in September, this week also raised the cash reserve ratio to 9 percent from 8.75 percent and said the bank had ``headroom'' to further tighten monetary policy.

Higher energy and commodity prices are fuelling inflation across Asia, prompting central banks to raise borrowing costs. Pakistan's central bank on July 29 raised its key rate for the third time this year to tame inflation running at the fastest pace in three decades. Indonesia, Thailand and the Philippines have all increased interest rates in the past month.

Inflation Stable

``Inflation, on a week-on-week basis, has continued to remain stable,'' the finance ministry said in a statement today.

Inflation in the week accelerated because of an increase in the prices of pulses, fruits, spices and sugar. The manufactured price inflation rose 10.82 percent in the week ended July 19, compared with a 10.72 percent gain in the previous week, today's report showed.

India's central bank raised its year-end inflation forecast to 7 percent from 5.5 percent and lowered its growth estimate for the year ending March 2009 to 8 percent from an earlier prediction of 8 percent to 8.5 percent.

Economists expect inflation to remain at elevated levels in the coming months.

``We expect double-digit inflation to continue,'' said Rohini Malkani, an economist at Citigroup Inc. in Mumbai ``We expect the Reserve Bank to maintain its tightening stance using a combination of the repurchase rate and the cash-reserve ratio.''

Interest Rates

Rising interest rates have led to increased monthly loan payments for borrowers, resulting in defaults, and are hurting profits at lenders including State Bank of India Ltd. and ICICI Bank Ltd.

State Bank this week reported the slowest profit growth since 2006 and net income at ICICI Bank dropped 6 percent.

Faster inflation and record-high borrowing costs are also affecting vehicle sales. Purchases of two-wheelers, cars and trucks grew 6.6 percent in June, slower than the 8.1 percent increase in May, according to the Society of Indian Automobile Manufacturers.

The government may revise today's preliminary wholesale- price estimate in two months after receiving additional data. The commerce ministry today raised its inflation estimate for the week ended May 24 to 8.9 percent from 8.24 percent.