India data put rate cut hopes on hold
INDIA’S retail inflation accelerated more than economists estimated and factory output rose, complicating central bank governor Raghuram Rajan’s next move after an unscheduled interest-rate cut last week.
Consumer prices rose 5.37 percent in February from a year earlier after a revised 5.19 percent increase in January, the statistics ministry said in New Delhi yesterday.
The median of 38 estimates in a survey of economists had predicted a 5.21 percent gain. Industrial production rose 2.6 percent in January, compared with a 1.7 percent rise the previous month and 0.7 percent predicted gain.
Rajan cited slowing inflation and weakness in Asia’s third-largest economy when he cut the benchmark repurchase rate on March 4, the second such move this year, days after the government agreed to a formal inflation target.
Faster inflation reduces the chance of another cut next month as Rajan seeks to keep price gains within 6 percent by January.
Indian inflation will stay above 6 percent in the fiscal year starting next month, requiring the central bank to keep a tight monetary policy to meet its target, the International Monetary Fund said in a report this week.
Decrease
Rajan, who reduced the repurchase rate to 7.5 percent earlier this month, has said he wanted to keep real rates between 150 and 200 basis points.
Interest-rate swops show that investors are betting that India will cut the benchmark rate, now at 7.5 percent, by another 50 basis points by the end of 2015, the steepest decrease after Turkey among 14 emerging markets tracked by HSBC.
A drop in global crude prices over the past six months and contained food costs have helped keep inflation under the central bank’s 6 percent goal for this year and the next.
The central bank would seek to bring inflation “to the mid-point” of the target agreed with the government last week, or 4 percent, by April 2018, Rajan said.
With the new inflation mandate, Prime Minister Narendra Modi agreed to a year-long quest by Rajan to boost the central bank’s independence and focus on price stability in the nation, which has one of Asia’s fastest inflation rates.
Also key to Rajan’s next move is monetary policy in the US, where Federal Reserve chair Janet Yellen has begun preparing investors for an increase in interest rates this year, economists say.
That will weaken demand for emerging-market assets and could destabilise the rupee.