India's inflation is racing ahead
India has long been aiming for double digits. But today’s ones are not good news: inflation accelerated at its fastest pace for more than a year, drawing dangerously close to the 10 per cent threshold (9.78 per cent). This earns India the dubious title of worst performer within the Brics club, with even Brazil (7.2 per cent) and Russia (8.2 per cent) trailing behind.
Meanwhile growth, the traditional bearer of double-digit hopes, fails to impress. The Asian Development Bank revised its expectations from 8.2 per cent to 7.9 per cent this week, and growth in July was the lowest in two years.
Hence the dilemma for the Reserve Bank of India, India’s Central Bank. On the one hand, engrained inflation would dictate another hike in interest rates. This would also support the rupee, whose slide against the dollar threatens to make imports more expensive and feed in the inflation spiral. But higher rates would hurt car and home purchases, slow down public projects, and impact the powerful steel industry. Growth, already dragged down by Western economic woes, would be stymied further.
New Delhi still shows steely resolve: the Central Bank is keen to go ahead with another 0.25 per cent rates increase this Friday. If it has to contain ever-rising prices, it probably has no choice. But it shouldn’t discount the hike’s likely side effects.