3 reasons behind India's looming 5% inflation

This reading will be the highest since June 2011.

According to DBS, headline inflation has been inching up and is expected to hit 5% YoY in September, the highest reading since June 2011. The rise in inflation can be attributed to several factors.

Here's more from DBS:

Firstly, loan growth has been strong (hovering above 25% YoY) in recent months on the back of robust domestic demand.

Secondly, the rupiah is significantly weaker compared to the same period last year. This has contributed to imported price inflation. Thirdly, food prices have clearly outpaced the other components of the CPI. In YoY terms, the food price inflation has stayed above 7% since May.

Lastly, base effects have also been unfavorable since early this year. Thus far, price pressures have been manageable and inflation is expected to average 4.7% in 2012.

However, that is due in large part to Indonesia’s energy subsidy policy. There are upside risks to our 5.1% inflation forecast for 2013 if the government acts to reduce fuel and electricity subsidies in the coming months.

The trade balance has narrowed from a deficit of USD 1.3bn in June to USD 0.2bn in July. In August, a deficit of USD 0.2bn is expected. Commodity prices remain unfavorable for the trade balance.

Oil prices had stayed elevated through August while prices for key exports such as coal and palm oil have been depressed. Combined with lackluster external demand, exports have underperformed over the past year. Meanwhile, import growth has finally started to slow.

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