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April was the sixth straight month in which retail inflation was higher than the RBI’s medium-term target of 4%. Photo: Mint
April was the sixth straight month in which retail inflation was higher than the RBI’s medium-term target of 4%. Photo: Mint

India’s ‘ugly’ inflation to pile more misery on bond investors

India's retail inflation rose 4.6% in April from a year earlier giving ammunition to hawks in RBI's monetary policy committee for a repo rate hike adding to the woes of bond investors

Mumbai: India’s retail inflation accelerated more than estimated, giving ammunition to hawks in the Reserve Bank of India’s monetary policy committee for tightening policy and potentially adding to the woes of bond investors.

Retail inflation rose 4.6% in April from a year earlier, the statistics ministry said in a statement in New Delhi on Monday. That’s faster than the 4.4% Bloomberg consensus.

Monday’s data—the final price print before RBI’s monetary policy review on 6 June—adds to concerns that crude oil prices holding at current levels will fan inflation in Asia’s third-largest economy. The central bank expects oil prices averaging around $78 a barrel to stoke inflation by 30 basis points.

Brent crude averaged $71.76 a barrel in April, according to data compiled by Bloomberg. It touched a high of $78 this month.

Paying more for oil, the nation’s biggest import, will widen India’s current account deficit and make the economy more vulnerable to rising US interest rates. Bonds are poised to decline for the ninth month out of 10 amid concerns this might push the consumer-price inflation targeting central bank to raise interest rates sooner than later.

“Today’s inflation number is very ugly. It’s way above expectations," Rupa Rege Nitsure, chief economist at L&T Finance Holdings Ltd in Mumbai, adding that fuel prices are a worry. “RBI has a rule-based framework so most likely they will raise rates."

The onshore swap markets are pricing in at least 50 basis points of rate hikes over the next year. Those expectations got a boost after central bank deputy governor in charge of monetary policy, Viral Acharya, said he would vote for a withdrawal in monetary accommodation in June, citing sticky core inflation.

Indeed, core inflation, which strips out volatile food and fuel components, has been hovering over 5%, making the central bank uneasy about price pressures. That hardening in stance on inflation led to a selloff in bonds in April. The yield on the 10-year sovereign note rose 10 basis points on Monday to 7.83 percent, the highest close for benchmark debt since February 2016.

Selloff deepens

Foreigners have been pulling out of the bond market given a rise in US yields, and along with a slowdown in investments in stocks, they have contributed to weakness in the rupee—Asia’s worst performer this year. That, in turn, is stoking inflationary expectations, especially imported inflation.

“If India ceases to attract substantial investment in equities and securities, we could be looking at a shortfall of $19 billion this year," said Hugo Erken, a senior economist at Rabobank International. “All these developments do not bode well for inflation."

Rabobank expects inflation to pick up to 6.2% later this year.

In a further sign that pipeline pressures were building, wholesale prices also rose more than expected in April and there’s little respite in store. India’s state-run refiners resumed raising retail gasoline and diesel prices after a three-week break that coincided with the run-up to elections in a southern state.

HSBC Holdings Plc said in a note on Monday that rising oil prices would fan inflationary pressures in India. The bank changed its earlier call on the RBI and now expects two rate hikes this year, instead of a hold.

“From a domestic perspective, tightening may not necessarily be warranted, but the external turn raises pressure," economists at the bank said.

Archana Chaudhary , Manish Modi, Debjit Chakraborty and Kartik Goyal of Bloomberg contributed to this story.

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