India's inflation soars to 14-month high of 7.5 per cent; central bank likely to raise rates

MUMBAI, India – India’s worrisome inflation rose to 7.52 per cent in November, driven by soaring food and fuel prices, data showed Monday. The highest level in more than a year increases pressure on the central bank to raise interest rates this week.

The wholesale price index was up from 7 per cent in October. The sharp increase was the highest since September 2012 and was led by food prices jumping by 19.9 per cent over the previous November, dashing hopes that favourable monsoon rains would slow the runaway food inflation. Prices for fuel were also up 11.1 per cent.

Higher prices for food and fuel hit the hundreds of millions of poor Indians living on $2 per day particularly hard because they spend roughly half of their income on the staple items.

The grim inflation numbers increase the likelihood that the Reserve Bank of India will raise interest rates when it meets on Wednesday. The central bank’s new chief, Raghuram Rajan, has made battling inflation a priority since taking office two months ago, hiking the key interest rate twice since September to its current 7.75 per cent.

It’s unclear, though, whether the interest rate hikes have much effect on food inflation. Some analysts argue that Indian food prices are largely structural, driven by an inefficient distribution system that results in 30 per cent of produce spoiling before reaching markets.

Rajan has been under pressure from some corners to freeze or even cut interest rates to try to revive stalling growth in India’s wider economy. Asia’s third-largest economy expanded by 4.8 per cent in the July-September quarter, far below the 8 per cent rate the country averaged a few years ago.

Some business leaders have argued for lower interest rates to encourage businesses to borrow and invest and consumers to spend.

Rajan has said, however, that unchecked inflation will do greater damage to the economy in the long run since consumers will have less money to spend on manufactured goods and other items. He has also made clear he thinks the government should do more to foster investment by easing regulations and reviving stalled infrastructure projects.