Mumbai: India’s inflation zoomed past the central bank’s target, bolstering a view that interest rates may rise earlier than expected and offering little relief to battered bond markets.

Consumer prices rose 4.9% in November from a year earlier as food and fuel costs surged, the statistics ministry said in a statement on Tuesday. That’s the fastest pace in 15 months and exceeds all estimates in a Bloomberg survey, setting the stage for another jump in yields when markets reopen in Mumbai. The rupee weakened abroad after the data.

“Bond prices are suggesting a rate hike is almost a done deal," said Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset Management in Mumbai. “How soon you expect a rate hike, that’s what you have to ask."

Economists at Rabobank forecast an increase as early as the second quarter of 2018 even as IDFC Asset’s Choudhary predicts a “prolonged pause." The view dashes lingering hope for easing from government advisers seeking to spur below-potential growth, and may come as a blow to Prime Minister Narendra Modi whose party faces a close contest in elections in his home state on Thursday.

Investors will get an insight into the Reserve Bank of India’s thinking when it publishes minutes of its latest meeting on 20 December. By then, they’ll also have clarity on public opinion about Modi’s policies, because state election results are due 18 December.

Factory output rose 2.2% on year in October, another set of data showed Tuesday, less than the 2.9% survey estimate. Icra Ltd said India’s core inflation recorded a broad-based uptick to an eight-month high of 4.9% in November, from 4.6% in October.

RBI governor Urjit Patel left the benchmark repurchase rate at 6% last week and reiterated commitment “to keeping headline inflation close to 4 percent on a durable basis." He’s betting that previous cuts and a $32 billion recapitalization plan for state-run banks will help jumpstart lending, boost growth and possibly narrow a yawning output gap in 2018. That’s in line with forecasts from Goldman Sachs Group Inc., which is calling for three rate increases by mid-2019 as growth and inflation picks up.

Steeper & faster

Rabobank sees tightening that is steeper and faster. “The RBI will continue to raise rates until it reaches 7.25 percent in the second quarter of 2019," said Hugo Erken, senior economist at Rabobank in The Netherlands.

However, some economists such as Shubhada Rao at Yes Bank Ltd in Mumbai predict food costs will ease in the months ahead. The RBI is due to next review policy over 6-7 February and swap traders are pricing in a 48% probability of an interest-rate increase with a 52% chance of a hold.

“There is an upside risk to inflation from here on and that will be disappointing for bond markets," said Madhavi Arora, an economist at Kotak Mahindra Bank Ltd. “For the RBI, we expect them to be relatively hawkish, but do not think they will hike rates just yet." Bloomberg

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