India’s easing inflation only a temporary reprieve for Narendra Modi
India’s retail inflation eased from the fastest pace in 17 months, offering some respite to policy makers and bond investors battling the fallout of Prime Minister Narendra Modi’s expansionary budget.
The consumer price index (CPI), a measure of retail inflation, rose 5.07% in January from a year earlier, the central statistics office said in a statement in New Delhi on Monday, in line with the 5.1% Bloomberg consensus. However, the Reserve Bank of India (RBI) forecasts the pace could pick up to as fast as 5.6% by September once the government begins spending for the year starting 1 April.
“The CPI will move upwards” on implementation of the budget proposals, said N.R. Bhanumurthy, Delhi-based economist at the National Institute of Public Finance. “Forget about interest rate cuts, get ready for rate hikes instead.”
Investors still braving Asia’s worst bond market will now turn to the minutes of RBI’s latest meeting—due 21 February—to gauge the direction of interest rates in the coming months. RBI last week reiterated its commitment to contain inflation at about 4% over the medium term and more members of the six-member strong monetary policy committee turned hawkish: one voted for a rate hike and another gave up his call for cuts.
While most voted to keep the benchmark repurchase rate unchanged, the prospect of higher borrowing costs could make it tougher for Modi’s government to revive growth in time for national elections next year. The administration this month said it will widen its fiscal deficit targets to increase spending in the current fiscal year through 31 March and the next 12 months.
Morgan Stanley predicts RBI will tighten between October and December—or even before. Analysts led by Derrick Kam are watching oil costs, the impact of minimum guaranteed prices for crops and trends in government expenditure and rural wages.
“We do think that moderate risks are emerging on account of the wider-than-targeted fiscal deficits,” they wrote in a note before the inflation data. “The risks are also tilting towards an earlier-than-expected rate hike.” Bloomberg