Inflation back with a bang as note ban effect wears off

ANALYSTS SAID THE UPTREND IN PRICES WOULD BE DIFFICULT FOR RBI TO IGNORE, AND IT MAY NUDGE POLICY RATES HIGHER

Retail price inflation picked up in February, after having cooled the previous month to its lowest in at least five years, supporting the view that the Reserve Bank of India (RBI) no longer has room to ease monetary policy.

Last month, the central bank changed its monetary stance to “neutral” from “accommodative”, marking an end to a period in which it cut interest rates by a total of 175 bps from January 2015 to October 2016.

Consumer prices rose by an annual 3.65% in February compared with January’s 3.17% increase, data released by the ministry of statistics showed on Tuesday. Economists surveyed by Reuters expected prices to rise by 3.58% from a year earlier.

Wholesale prices also rose by a more-than-expected 6.55% in February year on year, compared with a 0.85% fall a year ago, driven by fuel and food prices, according to separate data released earlier by the ministry of commerce and industry.

Prime Minister Narendra Modi’s surprise ban on highvalue notes in November had hurt demand in India’s largely cash-driven economy and consumer price inflation has since been below the central bank’s target of 4%.

Annual retail food inflation rose to 2.01% last month from an upwardly revised 0.61% in January, pushed by faster increases in the prices of cereals, sugar and fruits, the data showed.

Analysts said the continued uptrend in prices would be difficult for the central bank to ignore, prompting it eventually to nudge policy rates higher to curb price pressures. “We remain out on a limb in our view that the central bank will have to reverse course and begin hiking rates over the next 12 to 18 months,” said Shilan Shah, India economist at Capital Economics.

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