Indian inflation crosses 5%, hits 10-month peak
Posted: 08 March 2008 0153 hrs

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NEW DELHI : India's inflation rate crossed five percent to hit a nearly 10-month high, according to official data Friday, dealing a blow to the government and reducing chances of an early interest rate cut.

Inflation climbed more than a tenth of a percentage point to 5.02 percent for the week ended February 23 from 4.89 percent the previous week, according to the wholesale price index, India's most watched cost-of-living monitor.

After the latest data, "the chance of a cut in interest rates in the near-term has reduced," said R. Balakrishnan, executive director at Mumbai's Centrum Broking.

Inflation is still far below its two-year high of 6.69 percent hit in early 2007. But inflation breached the central bank's target of close to five percent for this fiscal year ending March 31, 2008, and surprised analysts who forecast it would fall to around 4.8 percent.

The rise -- driven by hikes in the cost of fish, vegetables, fruit, milk and other essential foods -- also came as unwelcome news for the Congress-led government, which is worried about prices rising with just over a year to go before the next general elections, analysts say.

Inflation has been cited as a key factor in several recent state poll drubbings for Congress which largely owes its 2004 national election win to support from India's poor masses who have been hardest hit by price rises.

Inflation was last above five percent on May 19, 2007 when it stood at 5.06 percent).

Reserve Bank of India governor Y.V. Reddy said the central bank would continue to focus on achieving price stability at the same time as trying to achieve its other twin goal of economic growth.

"The large segments of the poor tend to reap the benefits of high growth with a time lag, while rise in prices affects them instantly," he said in a speech delivered in Paris on Friday released on the bank's web site.

"We recognise the limited capacity of the poor to bear (such) risks... in the absence of social security mechanisms and public safety net," he added.

Reddy added the bank was also concerned about rising global commodity and fuel costs. Falling Indian wheat and rice output is also stoking inflation.

The bank has raised interest rates nine times since 2004 to check prices but the stiff monetary tightening has been blamed for slowing an economic boom.

"Essentially the central bank and the government appear to be signalling that the risk to inflation is a bigger worry than the risk to growth," said JP Morgan analyst Rajeev Malik in a note to clients.

Growth is forecast by the government to slow to 8.8 percent this fiscal year from 9.6 percent the previous year and some economists say growth could fall as low as seven percent next year.

Both India and giant neighbour China -- whose economy grew by an even faster 11.4 percent last year -- have made fighting inflation a top priority. Inflation in China stood at 7.1 percent in January.

- AFP /ls