NEW DELHI (Reuters) - Inflation accelerated faster than expected in May, with higher manufacturing prices offsetting slower growth in fuel and food costs and adding pressure on the RBI to lift interest rates this week despite signs of economic slowdown.
The wholesale price index, India's main inflation gauge, rose an annual 9.06 percent in May, above the median forecast for an 8.70 percent rise in a Reuters poll and the April figure of 8.66 percent.
"The big surprise is mainly because of the sharp increase in manufacturing prices which implies that core inflation is picking up. This cements the case for a 25 basis points rate hike on Thursday," said Nomura economist Sonal Varma.
Headline inflation for March was revised up to 9.68 percent from an earlier reported 9.04 percent, continuing a recent trend of sharp upward revisions.
Annual manufacturing inflation in May was 7.27 percent, up from 6.18 percent in April, while annual fuel price inflation eased to 12.32 percent from 13.32 percent in April despite an increase in domestic gasoline prices in mid-May.
Sluggish investment, which was essentially flat in the March quarter on rising rates and slow government approvals of big projects after growing an annual 7.8 percent in the previous three months, has exacerbated tight industrial capacity.
Consumer demand, meanwhile, eased more slowly, growing at 8 percent in the March quarter from 8.6 percent on an annual basis in the previous quarter.
Fuel inflation has remained elevated as global hovers around $120 per barrel, which may prompt New Delhi to raise prices of diesel, cooking gas and kerosene, which would be politically unpopular in a country where nagging inflation has prompted protests and put the ruling Congress party on the defensive.
"The number is much higher than expected and a breach of the 9 percent mark without a diesel price revision and in a month when global commodity prices were softer highlights the underlying inflationary pressure in the economy," said Anubhuti Sahay, Economist with Standard Chartered Bank.
The benchmark 7.80 percent 2021 bond yield immediately rose 3 basis points to 8.33 percent after higher than expected inflation data.
The 5-year overnight indexed swap rate rose 4 basis points to 7.80 percent and the 1-year was 6 basis points higher at 8.02 percent after the data, dealers said.
The BSE Sensex trimmed gains to 0.22 percent from 0.4 percent before hand.
RATE HIKE SEEN
Despite most indicators showing signs of slowing growth, including worse-than-expected GDP growth of 7.8 percent in the March quarter, the Reserve Bank of India is expected to lift policy rates by 25 basis points on Thursday in what would be its tenth rate increase since March 2010.
"I think the RBI will probably look at the inflation issue more seriously," C. Rangarajan, the chairman of the Prime Minister's Economic Advisory Council, said on Tuesday.
However, weakening conditions globally and in Asia's third-largest economy may temper the RBI's recently hawkish policy stance in coming months.
On Tuesday, China reported consumer price inflation of 5.5 percent for May, its highest in nearly three years, and raised reserve requirements for banks in an effort to tame prices.
SIGNS OF SLOWDOWN
Recent indicators point to slowing growth in India.
The index of industrial output for April grew 6.3 percent, the slowest in 3 months with growth in the capital goods sector slowing to just over 14 percent in April.
Car sales rose 7 percent in May, the slowest in two years, and analysts expect a further decline as higher fuel prices, interest rates and vehicle costs crimp demand in the world's second-fastest growing vehicle market.
Credit growth has remained almost flat in the current financial year that started in April, with banks' loans growing only 0.3 percent since March end.
Policymakers have scaled back growth projections for the current fiscal year from 9 percent earlier to around 8.5 percent, with many private forecasts predicting growth below 8 percent as rising rates and sluggish investment take a toll.
RBI Governor Duvvuri Subbarao said early last month that some near-term growth should be sacrificed to tame high inflation, although global and domestic conditions have deteriorated since then.
Government officials have expressed concern that slowing growth will make it hard for India to meet its revenue targets for the year, which will in turn add make it harder to meet its goal of trimming the fiscal deficit....
