India’s wholesale price inflation is at a 30-year high, making rate hikes more likely

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A worker carries a sack of onions at a wholesale market in Kolkata, India December 14, 2021. REUTERS/Rupak De Chowdhuri

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  • May WPI drives inflation up 40.62% yoy, up from 38.66% in April
  • May WPI food inflation up 10.89% y/y versus 8.88% in April
  • Economists expect the central bank to raise interest rates in August

NEW DELHI, June 14 (Reuters) – High global energy and commodity prices combined with a weak rupee led to the fastest annual rise in Indian wholesale prices in more than 30 years and raised expectations for the central bank to impose further rate hikes.

A surge in crude oil and commodity prices since Russia invaded Ukraine in February has set inflation on fire in many countries and forced central banks to hike interest rates.

Wholesale prices (INWPI=ECI), similar to producer prices, rose 15.88% yoy in May, remained in double digits for the 14th straight month and were India’s highest since September 1991, according to economists.

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A Reuters poll of analysts had forecast a 15.10% rise.

The high rate is mainly due to rising prices for crude oil and natural gas, food, base metals and chemical products, the Department of Trade and Industry said in a statement on Tuesday.

Finished product prices, which contribute around 64% to the wholesale price index (WPI), rose 10.11% compared with 10.85% in the previous month, while fuel and electricity costs rose 40.62% from the same period last year.

On Monday, India reported that retail prices rose 7.04% year-on-year in May, down slightly from the eight-year high of 7.79% announced in April.

The bleak reports for the two main inflation measures led economists to expect the Reserve Bank of India (RBI) to hike interest rates at its next monetary policy meeting in August.

Aditi Nayar, an economist at ICRA, the Indian arm of credit rating agency Moody’s, said WPI inflation is expected to remain between 15% and 16% in June, mainly due to rising global crude oil prices. And she predicted a response from the RBI.

“We continue to expect 60 basis points of repo increases in the next two policy reviews,” Nayar said.

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RBI’s Monetary Policy Committee (MPC) raised its benchmark repo rate (INREPO=ECI) by 50 basis points to 4.90% last week after a 40 basis point hike in April, while hinting at further rate hikes.

Food prices, which accounted for about a quarter of the WPI index, rose 10.89% in May, although vegetable prices rose 18.26% year-on-year in May, compared to 23.24% the previous month.

A rise in wholesale food and energy prices is likely to affect retail prices as companies increasingly pass on high input costs to consumers.

Adam Hoyes, an economist at Capital Economics Singapore, said May’s WPI figures pointed to upside risk for consumer food inflation, which is politically sensitive in India.

“All of this will worry the RBI,

and suggests that the MPC will continue to tighten monetary policy with a 50 basis point hike in August.”

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Additional reporting by Aftab Ahmed; Edited by Simon Cameron Moore

Our standards: The Thomson Reuters Trust Principles.

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