India's headline annual inflation rate rose to a five-month high of 5.79 per cent in July as oil import costs and food prices were pushed up by a weaker rupee, with the government and the Reserve Bank of India (RBI) still struggling to stabilise the currency.
The latest reading takes the wholesale price index (WPI), the country's main inflation measure, beyond the Reserve Bank of India's comfort level of 4-5 per cent.
Analysts polled by Reuters had expected a slight pick-up to 5 per cent from 4.86 per cent in June.
The rupee has lost around 12 per cent to the dollar since the start of May, caught up in an exodus of foreign investors from emerging markets after the US Federal Reserve said it would begin scaling back stimulus measures.
A 10 per cent depreciation in the rupee would add 1.5-2.0 percentage points to the headline inflation rate, according to a report released by analysts at Stanchart in June.
May's WPI reading was revised down to 4.58 per cent from 4.7 per cent.
Manufacturing inflation, which the central bank monitors to gauge demand-driven price pressures, inched up to 2.81 per cent on an annual basis from 2.75 per cent in June.
The RBI, unlike other central banks, mainly uses the wholesale price index for setting its monetary policy, which is due for review next month.
But Prime Minister Manmohan Singh's minority government will be worried by consumer price inflation near double-digit levels as it seeks to woo voters ahead of a national election due by May.
Data released on Monday showed that the annual consumer price inflation slowed in July but remained elevated at 9.64 per cent, from 9.87 per cent the previous month.
Indian authorities are desperately trying to stabilise the rupee, worried by both the impact on inflation and on a current account deficit that was a record 4.8 per cent of gross domestic product in the fiscal year that ended in March.
"The RBI and Indian government are in crisis mode, trying to stabilize the INR and prevent a snowballing currency depreciation," said Rajiv Biswas, Asia Pacific chief economist at IHS Global Insight, in a research note.
"That could trigger a downward spiral of capital flight and rising inflationary pressures from import prices," he said.
On Tuesday, India hiked the import tax on gold to a record 10 per cent and also raised the tariff on silver to curb the current account deficit.
A day earlier, the government announced plans to make it easier for corporates to raise overseas loans, which could bring in an additional $11 billion this fiscal year to help finance the current account deficit and take pressure off the rupee.
India's benchmark 10-year government bond extended losses after the headline inflation data.
The benchmark 10-year bond yield rose as much as 8 basis points to 8.55 per cent after the data. It had closed at 8.40 per cent on Tuesday.
Copyright: Thomson Reuters 2013
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