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Indian Inflation at 5-Year High Puts RBI’s Policy Stance at Risk

Anirban Nag and Kartik Goyal
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Indian Inflation at 5-Year High Puts RBI’s Policy Stance at Risk

(Bloomberg) -- India’s consumer price inflation hit a more than five-year high, boosting the case for the central bank to keep interest rates on hold for longer and possibly putting at risk its accommodative stance.

Data Monday showed inflation breached the upper end of the Reserve Bank of India’s 2%-6% target band as it accelerated to 7.35% in December from a year earlier -- the steepest gain since July 2014. That’s faster than the 6.7% median estimate in a Bloomberg survey of 37 economists and compares with a 5.5% gain in the previous month.

Any immediate respite seems remote, as volatile crude oil prices amid U.S.-Iran tensions add to price pressures. In India, the world’s third-biggest oil importer, costs of everything from food to medicines and mobile-phone services have already been climbing.

Core inflation, which strips out volatile food and fuel prices, inched up to 3.75% last month from 3.5% in November.

The December price print is “unpalatably high,” said Aditi Nayar, an economist at ICRA Ltd. in Gurugram, near New Delhi. Concerns surrounding a higher core inflation trajectory are likely to be adequate for policy makers to remain on hold in February, and consider a possible change in stance from accommodative to neutral, she said.

The RBI cited “much higher than expected” inflation when it unexpectedly kept interest rates unchanged in December following five cuts totaling 135 basis points earlier in the year.

Price stability is the central bank’s prime objective as persistently high inflation disproportionately affects the poor, Governor Shaktikanta Das said last week. That’s a more cautious tone than his comments in December, when he said the central bank will maintain an easing bias for “as long as it is necessary” to revive economic growth.

What Bloomberg’s Economists Say

“Inflation is likely to take a few months before sliding back below the 6% upper end of RBI’s target band. That now rules out our expected 15 bps rate cut in April and the next rate cut can only be expected at the earliest in June, as inflation falls below 6% by then.”

-- Abhishek Gupta, India economist

Click here for the full note, and here for more research

“If oil and vegetable prices continue to remain high then inflation will hover near 6%,” said Rahul Gupta, head of research for currency at Emkay Global Financial Services.

Oil briefly rose above $70 a barrel this month for the first time since September, and while they’ve since eased, prices remain elevated compared to last year.

The central bank will make its next interest rate decision on Feb. 6, days after Finance Minister Nirmala Sitharaman is scheduled to deliver a budget speech. With limited room for more central bank easing, all eyes are on the government to take steps to boost growth from 5% this fiscal year, the slowest pace in more than a decade.

The spike in inflation and expectations of fiscal slippage are weighing on the outlook for Indian sovereign bonds. For now though, sentiment is being buoyed by the RBI’s Operation Twist, in which the central bank has bought longer-maturity bonds and sold shorter-term ones.

The yield on benchmark 10-year government bonds has declined by about 15 basis points since Operation Twist was announced in mid-December.

“The next few weeks are going to be a bit choppy for bonds,” said Sandeep Bagla, an associate director at Trust Capital Services India in Mumbai. “I don’t see any great joy on the face of increasing headline inflation.”

--With assistance from Tomoko Sato and Vrishti Beniwal.

To contact the reporters on this story: Anirban Nag in Mumbai at anag8@bloomberg.net;Kartik Goyal in Mumbai at kgoyal@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram, Unni Krishnan

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