Inflation has picked up for the first time in seven months in February as rising food prices began to bite, but it remained below the central bank’s medium-term target, a Reuters poll found.
Prime Minister Narendra Modi’s ban on high-value bank notes in November hurt demand in the largely cash-driven economy and consumer price inflation has since been below the Reserve Bank of India’s 4% target.
According to the poll of over 25 economists, the inflation rate for February rose to a three-month high of 3.58% from 3.17% in January.
“The food component is largely seen responsible for the expected upswing in inflation trajectory, with core inflation also likely to pick up pace faster than what it has been in the last couple of months," said Anjali Verma, chief economist at PhillipCapital India.
Among the food components, fruit and vegetable prices, which have been contracting for the last 6 months, are largely expected to contribute to the rise in February, she added. The government’s demonetisation drive removed 86% of the currency in circulation, hitting companies, farmers and households.
Factory and services activity felt the brunt of the currency ban, contracting in the month after the move was announced. Since then, demand has slowly recovered and the services industry, which constitutes around 60% of India’s gross domestic product, returned to growth in February.
India’s economy grew 7% in the October-December quarter of 2016, beating more modest expectations in a Reuters poll for 6.4% but slower than the July-September quarter reading of 7.4%.
The central bank cited risks of high inflation when it left the benchmark lending rate unchanged at 6.25% and changed the policy stance to “neutral" from “accommodative" in last month’s meeting.
Wholesale price inflation is also expected to have picked up last month, to 5.90% from 5.25% in January, according to the poll. That would be its highest reading since May 2014.
Industrial output likely accelerated 0.5% in January from a year ago after falling 0.4% in December. Reuters