Indian inflation at 15-month high
mumbai — India’s inflation zoomed past the central bank’s target, bolstering a view that interest rates may rise earlier than expected and offering little relief to battered bond markets.
Consumer prices rose 4.9 per cent in November from a year earlier as food and fuel costs surged, the Statistics Ministry said on Tuesday. That’s the fastest pace in 15 months and exceeds all estimates in a Bloomberg survey, setting the stage for another jump in yields when markets reopen in Mumbai. The rupee weakened abroad after the data.
“Bond prices are suggesting a rate hike is almost a done deal,” said Suyash Choudhary, Mumbaibased head of fixed income at IDFC Asset Management in Mumbai. “How soon you expect a rate hike, that’s what you have to ask.”
Economists at Rabobank forecast an increase as early as the second quarter of 2018 even as IDFC Asset’s Choudhary predicts a “prolonged pause.” The view dashes lingering hope for easing from government advisers seeking to spur below-potential growth, and may come as a blow to Prime Minister Narendra Modi whose party faces
Vegetable vendors await customers at a market in Gujarat. Food and fuel costs up in November.
a close contest in elections in his home state on Thursday.
Investors will get an insight into the Reserve Bank of India’s thinking when it publishes minutes of its latest meeting on December 20. By then, they’ll also have clarity on public opinion about Modi’s policies, because state election results are due December 18.
Factory output rose 2.2 per cent on year in October, another set of data showed on Tuesday, less than the 2.9 per cent survey estimate. ICRA Ltd said India’s core inflation recorded a broad-based uptick to an eight-month high of 4.9 per cent in November, from 4.6 per cent in October.
RBI Governor Urjit Patel left the benchmark repurchase rate at six per cent last week and reiterated commitment “to keeping headline inflation close to four — AFP per cent on a durable basis.” He’s betting that previous cuts and a $32 billion recapitalisation plan for state-run banks will help jumpstart lending, boost growth and possibly narrow a yawning output gap in 2018. That’s in line with forecasts from Goldman Sachs Group, which is calling for three rate increases by mid-2019 as growth and inflation picks up.
Rabobank sees tightening that is was the annual increase in consumer prices in November steeper and faster. “The RBI will continue to raise rates until it reaches 7.25 per cent in the second quarter of 2019,” said Hugo Erken, senior economist at Rabobank in The Netherlands.
However, some economists such as Shubhada Rao at Yes Bank Ltd in Mumbai predict food costs will ease in the months ahead. The RBI is due to next review policy over February 6 to 7 and swap traders are pricing in a 48 per cent probability of an interest-rate increase with a 52 per cent chance of a hold.
“There is an upside risk to inflation from here on and that will be disappointing for bond markets,” said Madhavi Arora, an economist at Kotak Mahindra Bank. “For the RBI, we expect them to be relatively hawkish, but do not think they will hike rates just yet.” — Bloomberg