India's inflation rate surges to 11.89 percent, industry growth declines to 6-year low of 3.8 percent

The figure is higher than what analysts forecast in a poll conducted by International Business Times.

The new figure is expected to make the central bank move to tighten monetary policy further.

Last month the Reserve Bank of India (RBI) moved to hike the repo rate, or the key lending rate at which the central bank lends funds to commercial banks, from 8 percent to 8.50 percent, and the cash reserve ratio (CRR) or the proportion of reserves the commercial banks must keep with the central bank, from 8.25 percent to 8.75 percent.

Though it termed its action "somewhat painful," the central bank said it will continue its "heightened vigil" and will act again, if necessary, to keep inflationary pressures down.

The bank is scheduled to meet on July 29 for its quarterly policy review but may act sooner to tame inflation.

Further hike in key rates will make borrowing more difficult and may lead to decline in business investment, resulting in economic slowdown.

The latest industrial growth data or Index of Industrial Production (IIP) showed that India's industrial output declined to a 6-year low of 3.8 percent in May 2008, lower than 10.6 percent posted for the corresponding period last year. In April 2008, it grew by 7 percent.

Production of manufacturing goods, which has a weight of over 79 percent in IIP, showed a growth decline, posting 3.9 percent growth in May, compared to 11.3 percent a year earlier.

Capital goods output growth slowed to 2.5 percent in May, compared to 22.4 percent a year earlier.

Electricity production growth rate slipped to 2 percent in May from 9 percent a year earlier.

However, mining industries showed a positive growth of 5.2 percent in May, up from 3.8 percent a year earlier.

Consumer durables also showed a positive growth of 4.4 percent in May, compared to a decline of 0.7 percent a year earlier.

"The slowdown is across the board with both consumer and capital goods much weaker than expected," said Sonal Varma, economist at Lehman Brothers in Mumbai.

"Slowing growth and rising inflation adds to the monetary policy dilemma," Varma said, adding, "The momentum in inflation continues to accelerate and that is a worrying sign. With rising input costs, there is a lot of pressure on producers to increase output prices."

Varma said she expected the central bank to raise its key lending rate from 8.5 percent later in July.

Unlike the consumer price index, which is published monthly, the widely watched wholesale price index covers greater number of products in its computation and is published weekly.

Reacting to the new inflation data, the Finance Ministry urged the people to remain calm as fiscal and monetary measures taken by the government and the central bank would take some time to take effect. A statement issued by the Finance Ministry said in spite of surging inflation, the data showed that prices of some essential commodities had stabilized and the prices of 12 articles in the primary articles group had in fact declined from the previous week.

"Prices of essential commodities which include foodgrains, pulses, edible oils, vegetables, dairy products and some other commodities like kerosene, soap, safety matches more or less stabilized," the statement said.

"In the primary articles group, out of the total 98 articles, 12 have shown a decline in prices as compared to previous week data. These include wheat, rice, maize, garlic, cabbage, cumin, black pepper, ginger and niger seed. Another 55 articles have shown no increase in prices," it said.

In the case of manufactured products, out of a total 320 commodities, 278 have shown no increase in prices over the last week, it added.

In the case of 16 commodities, including lead ingots, imported edible oil, pig iron, steel products and cotton seed oil, prices have actually declined, the statement said.

Inflation rose, the statement said, mainly due to price rise in petrol, diesel, LPG, fruits, vegetables, pulses, spices, bajra and some manufactured products like cement (which increased by 1 percent) and edible oils (which increased by 2 percent).

Finance Minister P. Chidambaram has blamed India's high inflation rate on global issues like high food and oil prices as well as economic slowdown in the US.

Market analysts have warned consumers to brace themselves as inflation rate is likely to go beyond 14 percent before moderating towards the end of this year.

According to Rupa Rege Nitsure, chief economist at Bank of Baroda, the June fuel price rise and higher money supply growth were having a cascading effect on inflation. "I see it peaking at about 13.5-14 percent in early October," she said.

Robert Prior-Wandesforde, HSBC Bank's chief economist on Indian market, said the government and the central bank should focus on the currency market. "[They have to] attempt to drive the rupee higher again. This would be the more effective and quicker acting means of controlling inflation," he said.

According to Arvind Virmani, chief economic adviser, Ministry of Finance, it will take some time for RBI's move to take its effect and one could expect to see inflation moderate around September.

Agrees V. Vaidyanathan, executive director at ICICI Bank. "We will have to be patient over the next five to six months for the fiscal and monetary measures to make its impact," Vaidyanathan said.