Headline Inflation as measured by Wholesale Price Index increased to 9.78% in August 2011

India's wholesale price index ( WPI) rose 9.78% in August 2011 on year-on-year basis. Headline inflation as measured by the wholesale price index quickened to 9.78% in August from 9.22% in July. The rise in headline inflation has been attributed to costlier food, fuel and manufactured products.

The surge in input prices of non-food primary articles together with currency depreciation will put pressure on the output prices in following months. Factory output growth in July grew by 3.3%, the slowest in 21 months hinting at an imminent industrial slowdown. The rising input costs and costlier borrowings are believed to be squeezing corporate profitability, forcing them to defer investment plans.

India's April-June quarter growth of 7.7 percent was the weakest in six quarters. Manufacturing inflation quickened to 7.79 percent in August from 7.49 percent in the previous month and its highest in three years, indicating that manufacturers still retain pricing power.

India's benchmark 10-year bond yield briefly eased 2 basis points to 8.31 percent while swap rates were little changed.

The RBI raised interest rates by 11 times in the past 16 months to cool prices and control inflationary pressures. The rate hikes however led to slowdown in the domestic economy. the slew of fiscal and monetary steps already taken to cure inflation not only failed to tame prices, but also impacted growth and hurt investments.

The monetary tightening cycle in operation since March 2010. The RBI so far increased rates by a cumulative 325 basis points and the central bank’s measures left industry complaining about rising cost of funds and banks fearing that rising rates will lead to an increase in bad loans.

RBI Governor Duvvuri Subbarao is currently under increasing pressure to bring the current tightening cycle to a close.