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India's inflation accelerates in May, rate hike seen

India's annual inflation accelerated a faster-than-forecast 9.06 % in May, official data showed on Tuesday, increasing pressure on the central bank to raise interest rates further.

business Updated: Jun 14, 2011 15:51 IST

India's annual inflation accelerated a faster-than-forecast 9.06 % in May, official data showed on Tuesday, increasing pressure on the central bank to raise interest rates further.

The rise in the wholesale price index -- the government's preferred measure of the cost of living -- was much higher than April's provisional 8.66 %, the ministry of commerce said.

Economists had forecast inflation in May to be 8.70 %.

Soaring prices are one of the biggest problems for India's government and inflation is the highest among all major Asian economies.

India's central bank, the Reserve Bank of India (RBI), has been among the most hawkish in the region, having increased key interest rates nine times in the past 16 months.

Economists expect the RBI to raise them again at its next monetary policy meeting on Thursday.

"We expect the RBI to stay hawkish," said Siddhartha Sanyal, chief India economist with Barclays Capital, who expects a 25 basis points hike this week and again in July.

Economists now say inflation, initially fuelled by spiralling food prices, has spilled over into the general economy, pushing up wages and other costs.

Price rises are a major political headache for the embattled Congress-led government, which is also reeling from a spate of corruption scandals.

Poorer households -- the backbone of the party's support -- have been especially hard hit by inflation, which is a traditional lightning rod for political discontent in the country of 1.2 billion.

Tuesday's data showed prices of non-food articles rose 22.35% in May from a year earlier, led by a rise in prices of fibres.

The cost of fuel and power climbed 12.32 % year-on-year, while food rose 8.37%, the commerce ministry data showed.

"Inflation spilt over from commodities to core inflation, which has led the RBI to maintain its anti-inflation bias," said Nick Paulson-Ellis, country head of Espirito Santo India.

The global investment bank expects the RBI to raise rates by 25 basis points three times between now and September.

RBI governor Duvvuri Subbarao has said he is prepared to act to tame inflation even at the expense of short-term growth.

India's industrial activity has already slowed, with output in April halved to 6.3 % year-on-year.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) also urged India to redouble efforts to tackle inflation, calling for economic growth to be more inclusive.

"In the near term, the authorities need to remain vigilant against the risks of high inflation and volatile capital flows," the Paris-based organisation said in its latest economic survey of India, published Tuesday.

But economists say that policy makers have a battle on their hands, with rising commodity prices and costlier fuel likely to keep inflation well above the RBI's comfort level of between 5.0 and 6.0%.

A government panel is likely to decide soon on future possible price hikes of diesel and cooking fuels to help oil retailers cut their revenue losses from selling at discounted prices.

The ministry also revised upwards the inflation rate for March to 9.86% from the provisional 9.04 % reported earlier.

The RBI expects the cost of living to remain at elevated levels through the first half of the year before moderating.