New Delhi: India’s headline inflation in February came within touching distance of the double digit mark, making rate action by the Reserve bank of India (RBI) very probable in its scheduled April policy review.
Wholesale price inflation accelerated to 9.89% in February from a year ago, above the RBI’s end March projection of 8.5% and higher than the 8.56% level recorded in January this year.
A Reuters poll had estimated headline inflation in February to be 9.62%.
The inflation data comes on heels of a 16.7% annual increase in industrial output in January, signalling how a faster-than-expected economic pickup may pressure the central bank to raise key policy rates by at least 25 basis points.
Markets have already priced in that possibility.
“This seals the case for rate hike so we expect both reserve ratio and interest rate hike on or before April policy meeting,” Ramya Suryanarayanan, economist, DBS, Singapore said.
“It worrying that inflation always turns out higher than expected and the fact that there is a huge backward revision is also not good.”
The December WPI was revised to 8.10% compared with 7.31% previously.
The partially convertible rupee was almost unchanged at 45.57/58 immediately after the news. It had closed at 45.43/44 per dollar on Friday.
The 10-year bond yield edged up 1 basis point to 8.02%, matching a 17-month high touched last week. It had closed at 8.01% in the previous session.
The 30-share BSE index was barely moved by the data and was trading down 0.4% at 17,091.49 points.
Despite the strong inflation and industrial output numbers, most analysts expect the central bank to act only in its April policy review and not before that.
The RBI will also be mindful that any hike in rates could add to the cost of the government’s record borrowing needs of about $100 billion next fiscal year.
The high inflation number was mainly due to the continued rise in food prices. The food price index rose 17.79% in February.
Inflation in manufacturing also accelerated to 7.42% in February from 6.55% in January, indicating that inflation has now spilt over to the broader economy and is now not just restricted to the food sector.
Top policymakers including the deputy chairman of India’s planning commission and the chief economic adviser to the Finance Ministry have said that food prices and headline inflation will moderate over the next few months.