Food-driven inflation spurt keeps RBI on guard

MUMBAI: India’s inflation quickened for the first time in four months, while manufacturing production surged more than forecast, giving the central bank reason to keep interest rates higher for longer.

The consumer price index (CPI) rose 5.55% in November from a year earlier, slightly lower than economists expected, moving further away from the Reserve Bank of India’s (RBI) 4% target.

The pickup in inflation was largely driven by higher food prices, an issue that’s become a bigger concern for Prime Minister Narendra Modi’s government ahead of elections.

The government has restricted exports of a wide range of food staples, including onions, wheat and rice, as it tries to curb costs for consumers.

Economists pointed to an easing in core inflation, which excludes volatile food and energy costs, as a sign that the RBI may keep rates on hold for longer, and likely cut rates next year.

Core prices rose 4.12% in November from a year earlier, down from 4.25% in October, according to estimates from Bloomberg Economics.

“High food inflation has disrupted CPI inflation’s moderating trajectory, but inflation expectations appear anchored, despite rising food prices, and there is no evidence of any material second-order effects,” Rahul Bajoria, an economist at Barclays Plc, wrote in a note.

The RBI kept its benchmark interest rate unchanged for a fifth straight policy meeting last week, with governor Shaktikanta Das warning about the risks from food prices.

Economists predict the RBI will likely keep rates on hold well into next year and possibly only ease after the US Federal Reserve begins cutting interest rates.

Separately, the government also released figures showing growth in factory output accelerated to a 16-month high of 11.7% in October, adding to the economy’s strong outlook.

The central bank last week kept its inflation forecast unchanged at 5.4% for the current financial year but raised its growth projection to 7% from 6.5%.

Axis Bank Ltd estimates India’s potential growth has increased to 7%, which implies the economy can expand at that pace without triggering an inflation spiral.

Food inflation, which makes up about half of the consumer price basket, accelerated to 8.7% in November from 6.61% in the previous month, Tuesday’s data showed.

Prices of pulses and vegetables jumped 20.23% and 17.7%, respectively, from a year ago. The cost of vegetables such as onions and tomatoes has surged after erratic rains during the monsoon period led to shortages. — Bloomberg