India Inflation Passes Record 12 Percent
Sign in

India inflation passes record 12 percent

Account Manager

Annual inflation in India passed 12 percent, reaching a thirteen-year high, despite months of increasingly restrictive monetary policy, the nation's Ministry of Finance reported Thursday. The wholesale price index the most-watched inflation benchmark inched up to 12.01 percent for the week ending July 26, marginally higher than the 11.98 percent reported for the previous week.

This time last year, when global commodities prices were far lower, annual inflation in India stood at just 4.7 percent, according to the Ministry of Commerce. While the Ministry of Finance characterized the weekly change as "stable," some in India have begun to question whether traditional monetary measures, like raising interest rates and requiring banks to keep more cash on hand, will work for India.

The Reserve Bank of India has been deploying those measures: Since April, it has hiked its key interest rate the repo rate, at which it makes short-term loans to commercial banks by 125 basis points and raised the cash reserve ratio the amount of cash commercial banks must keep on hand by 150 basis points. Banks have quickly passed on those higher rates to consumers.

In June, the State Bank of India, the nation's largest, with over 100 million customers, raised its benchmark prime lending rate by 50 basis points, to 12.75 percent. ICICI Bank Ltd, the nation's second largest, increased rates July 31.

Consumer loans, including home loans, now cost 14.25 percent a year, up from 13.50 percent. But many worry that such tightening won't effectively counter supply-side inflation, much of which has been imported in the form of high commodities prices.

They note that, unlike in the U.S. and Europe, the vast majority of businesses in India remain in the informal sector, rarely interfacing with banks. "Tightening credit in three consecutive quarters has not helped in lowering inflation," said Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry (FICCI), which represents over 250,000 businesses across the country.

Ninety-three percent of Indians work in the informal sector, so just a fraction of the nation's 44 million entrepreneurs borrow money from banks, he said. "Squeezing credit is essentially squeezing credit for the organized sector," he said.

The first to get cut off from credit, he added, are risk-prone small and medium enterprises. He worries that instead of lowering inflation, tight money will curb growth and boost unemployment.

"If this kind of strict monetary policy is followed further, we are apprehensive," he said. Still, Mitra said the weekly uptick in inflation is nothing to panic about because over the near-term oil and food prices are likely to moderate.

It will take two months for softening global oil prices to be felt in India, and the monsoon rains that pound down each afternoon mean that this year's bumper harvest has yet to reach markets, he said. "We have to see what happens in the future.

This is a time when the inflation rate is not something we need to panic about," he said.

start_blog_img