India CPI quickens more than estimated, clouding rate calls

[MUMBAI] 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 per cent in February from a year earlier after a revised 5.19 per cent increase in January, the Statistics Ministry said in a statement in New Delhi on Thursday. The median of 38 estimates in a Bloomberg survey of economists had predicted a 5.21 per cent gain. Industrial production rose 2.6 per cent in January, compared with a 1.7 per cent rise the previous month and 0.7 per cent predicted gain.

Mr 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 that came days after the government agreed to a formal inflation target. Faster inflation reduces the chance of another cut next month as Mr Rajan seeks to keep price gains within 6 per cent by January.

"Overall inflation is still within the comfort band and I think the target of 6 per cent by January 2016 is very much achievable at this time," Dharmakirti Joshi, chief economist at Crisil Ltd in Mumbai, said on Bloomberg TV India. He expects another 50 basis points of cuts in the fiscal year starting April 1.

Three-month offshore non-deliverable rupee forwards rose 0.5 per cent to 63.56 a dollar, data compiled by Bloomberg show. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Indian inflation will stay above 6 per cent 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. Mr Rajan, who reduced the repurchase rate to 7.5 per cent earlier this month, has said he wants to keep real rates between 150 and 200 basis points.

Interest-rate swaps show that investors are betting that India will cut the benchmark rate, now at 7.5 per cent, by another 50 basis points by the end of 2015, the steepest decrease after Turkey among 14 emerging markets tracked by HSBC Holdings Plc.

"It's going to be a very challenging and interesting exercise for the RBI," Madan Sabnavis, chief economist at CARE Ratings in Mumbai, said on Bloomberg TV India before the data was released. He cited a pick-up in growth and India's dependence on monsoon rainfall as possible future risks.

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 per cent goal for this year and next. The central bank will seek to bring inflation "to the mid-point" of the target agreed with the government last week, or 4 per cent, by April 2018, Mr Rajan said.

With the new inflation mandate, Prime Minister Narendra Modi agreed to a yearlong quest by Mr 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 Mr 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 destabilize the rupee.

"The fear of a Fed hike will also continue to be there," said Kunal Kundu, an economist with Societe Generale SA in Bengaluru, the southern Indian city formerly known as Bangalore. "They will possibly wait and see how the currency reacts around that."

BLOOMBERG