Inflation accelerates in September

Inflation accelerates in September

New Delhi: India’s annual headline inflation accelerated slightly in September on supply constraints in food, reinforcing pressure on the Reserve Bank of India (RBI) to raise rates at its 2 November policy review.

The wholesale price index (WPI) rose 8.62% in September compared with 8.5% in August.

Markets expect the RBI to raise rates by a quarter of a percentage point by the end of 2010 to rein in inflationary expectations.

“The September inflation data provide a fresh reminder that the Reserve Bank has no room for complacency on bringing down inflation," said Sean Callow, senior currency strategist at Westpac Institutional Bank in Sydney.

The RBI said last month that it was nearing completion of the process of “normalising" policy rates. The RBI has since March lifted its main policy rate five times by a total of 125 basis points.

South Korea on Friday was the latest RBI in Asia to pause their rate hike cycles in recent months, to help keep heavy capital inflows at bay and citing uncertainties about the strength of the global economic recovery.

Stubborn Food Inflation

Annual food price inflation accelerated to 15.71% in September after floods across the country and highlighting concerns from policymakers that food inflation in India may have become a structural cause of high headline inflation.

The 10-year bond yield edged 1 basis point higher to 8.05% after the data. It had closed at 8.02% in the previous session.

India’s Overnight Indexed Swap (OIS) curve flattened with the shorter-end rates posting a bigger rise after inflation was higher than expected.

The one-year swap rate edged up 4 basis points to 6.70% after the data while the five-year benchmark swap rate rose 2 basis points to 7.11%.

“I expect the Reserve Bank of India to continue its caliberated tightening -- 25 basis points hike in both repo and reverve repo rates and may be also 25 basis points increase in banks’ cash reserve ratio." said Rupa Rege Nitsure, chief economist at the Bank of Baroda in Mumbai.

The partially convertible rupee was largely steady after the inflation data at 44.03/04 per dollar. It had closed at 44.11/12 on Thursday, but it has risen more than 5% since the start of the year.

“(The data) also argues for rupee appreciation being used as a tool to help fight an inflation problem that much of Asia doesn’t face, at least not yet," Callow said.

Markets are expecting heavy capital inflows for India’s largest IPO for Coal India, a coal mining giant, slated to hit the markets next week, and that could strengten the rupee further.

But the policymakers have said that they do not plan to use the appreciating rupee as an anti-inflationary tool.

India’s industrial output plummeted to single-digits for August largely on a contraction in capital goods and consumer non-durables but traders were looking for inflation data for cues on the RBI’s possible policy response in the policy review.

Manufacturing inflation in September was an annualised 4.59%.

The Indian economy, Asia’s third largest, is expected to grow 8.5% in the current fiscal year, but the RBI has gradually tightened monetary policy as it seeks to anchor inflationary expectations.

High prices are a headache for the Congress party-led coalition government, with over 40% of India’s 1.2 billion people living on less than $1.25 a day, and could mar the party’s chances in crucial state elections this year and the next.