MUMBAI, India (AP) — India's inflation accelerated to 7.8 percent in September after the government hiked subsidized fuel prices to rein in the budget deficit.
The number released Monday is worse than expected and gives the central bank little room to cut its key interest rate to counter slowing economic growth when it meets later this month.
Economists polled by CNBC-TV18 forecast inflation of 7.7 percent in September.
Core inflation, which excludes volatile food and fuel prices, remained unchanged from August at 5.6 percent.
"Core inflation has remained sticky," said Sonal Varma, economist at Nomura Financial Advisory and Securities in Mumbai. "We were expecting some marginal drop."
She said headline inflation is likely to continue to rise as second round effects of higher fuel costs show up in, for example, rising food prices, reflecting increased transportation costs.
Fuel prices rose 4.0 percent, driven by an 8.6 percent rise in diesel costs.
The Reserve Bank of India has made clear that inflation remains its top concern, despite the tepid growth of Asia's third-largest economy. The central bank has also pushed New Delhi to take credible steps to bring the fiscal deficit under control and enact reforms to unblock supply bottlenecks in the economy and bring prices down.
New Delhi has finally begun to respond, raising diesel rates and opening airlines and retailing to greater foreign ownership. That could bring crucial investment to India's inadequate supply chains, particularly for food.
"On one hand we do have the government's political response coming in, but inflation is not giving them the window to respond to the space the government is trying to create," Varma said. "Our view is RBI will wait for inflation to moderate."
Some economists argue that New Delhi's reforms don't go far enough to return India to a path of high but non-inflationary growth.
"I have sincere reservations on how these measures which have been announced can actually impact growth," said Mumbai-based economist Jay Shankar. "You will have to wait two or three years to see investment coming in."
In the meantime, he said the government urgently needs to push through delayed tax reforms that would create a unified, national system of taxation, ending the jumble of conflicting state tax codes.
"It would be the equivalent of a free trade agreement within the states, so you have free movement of goods and services within the country," he said. "That will push up the growth rate of the economy by more than one percentage point minimum."
For India to escape the trap of slow growth and high inflation, the government is also going to have to kick start the investment cycle, by speeding up tens of billions of dollars of planned investment in roads, bridges, ports and oil and gas, he said.
"The private sector will not be willing to take that extra leap forward to start investing," he said. "You will have to incorporate the role of public sector undertakings in promoting that initial catalyst."
The government revised July inflation up to 7.5 percent, from its earlier estimate of 6.9 percent. Inflation was 7.6 percent in August.
September's inflation is the highest for India since last November, according to financial information provider FactSet.