Inflation On The Increase

Wholesale inflation accelerated this week in India, to 5.32 percent.

The inflation rate rose to 5.32 percent in the week ended Dec. 9 from 5.16 percent in the previous week, the Ministry of Commerce and Industry said in its weekly statement in New Delhi today. The inflation rate had been estimated at 5.35 percent, according to the median forecast of 10 analysts surveyed by Bloomberg News.

Prime Minister Manmohan Singh's government wants to slow inflation to 4 percent as it faces seven state elections in 2007, the most important in the province of Uttar Pradesh which sends almost a seventh of lawmakers to parliament.

All of this is making the life of the RBI more difficult, since raising interest rates, which is proving difficult enough to do at the long end, only serves to suck in more money, due to the interest rate differential and the anticipated rise in the currency that the inflow produces:

Commercial banks' loans to companies have risen about 29 percent since April 1 from the same period last year, according to central bank data. The pace is close to the fastest since the Reserve Bank started collating information in 1971.

To curb inflation, the Reserve Bank of India announced on Dec. 8 an increase in the amount of cash lenders have to set aside to cover deposits, trying the third different policy tool in five months to curb inflation.

A higher cash-reserve limit will leave lenders with 135 billion rupees ($3 billion) less cash, and help slow lending, according to the central bank.

The move came after interest rate increases by the central bank failed to slow the record pace of bank lending. The central bank increased the overnight lending rate for the fourth time this year on Oct. 31. It raised its overnight borrowing rate three times this year in a bid to make fewer funds available to banks for lending.