India CPI surges, fuels rate-increase expectation
MUMBAI: India’s headline inflation accelerated for a seventh month to the fastest since May 2014 on higher fuel and food costs, sending bond yields higher and spurring expectations the central bank will raise rates further to tame prices.
Consumer prices increased 7.79% in April, the Central Statistics Office said in a statement. That compares with a 7.42% gain predicted in a Bloomberg survey of economists and 6.95% the previous month.
Inflation has been running ahead of the Reserve Bank of India’s (RBI) 2%-6% target range for four straight months. Governor Shaktikanta Das has since last month stressed the need to prioritise slow price gains over supporting growth, and the bank announced a surprise rate hike last week.
The stage is set for a likely further rate hike at the RBI’S next meeting in June, when it’s also expected to revise up its 5.7% inflation forecast for the current April-march fiscal year.
“Substantial policy catch-up is still needed,” Sonal Varma and Aurodeep Nandi at Nomura Holdings Inc wrote in a note yesterday, adding that they expect a 35-basis-point interest rate increase in June.
The yield on the benchmark 10-year bond rose as much as 8 basis points to 7.32% yesterday. The rupee, which dropped to a record low Thursday, was up 2% to 77.32 to the dollar as of 10:05am local time.
High inflation may force the RBI to raise rates by 75 to 100 basis points over the course of the fiscal year, said Gaurav Kapur, chief economist at Indusind Bank Ltd in Mumbai. Inflation will likely stay above 6% until September, he added.
“They will frontload hikes,” said Pankaj Pathak, fixed-income fund manager at Quantum Asset Management. “We should expect more in June and August, after that they may be more careful and watch the inflation trajectory and react.”
According to Thursday’s release, consumer food prices rose almost 8.4% while fuel gained about 11%.
Radhika Rao, senior economist at DBS Bank Ltd in Singapore, said in a note that she expects May inflation to “stay on the firmer end” of 6.5% to 7%, and sees 150-basis-point cumulative increases for the year, including the 40-basis-point hike last week.
Nomura economists wrote in their note that they expect inflation to average 7.2% in the fiscal year to March, up from an earlier forecast of 6.9%, and expect it to hit about 8% during August-september.