New Delhi: In a worrying development, India’s retail inflation accelerated, albeit marginally, to 5.41% in November, because of higher prices of food items, especially pulses.

Separate data released by the government showed that inflation based on the wholesale price index came in at -1.99% in November, the highest since January, as compared with -3.81% in October—partly because of higher food prices and the fact that the fall in international commodity prices like crude oil is gradually bottoming out.

Taking the two together, it seems that the threat of inflation has not yet receded. Especially, the rise in food inflation, suggests that the two back-to-back deficient monsoon years and the consequent impact on the rural economy is beginning to manifest itself. Consequently, a cautious Reserve Bank of India (RBI) is likely to adopt a wait-and-watch approach before proceeding with any further rate cuts.

“Inflation has turned up as anticipated, and is expected to rise further until December before plateauing. Although the seasonal moderation in prices of vegetables and fruits is expected to provide some respite, the El Nino-induced shortening of winter may limit this effect," RBI had said. “While oil prices, barring geopolitical shocks, are expected to remain benign for a few quarters more, the uptick of CPI inflation excluding food and fuel for two months in succession warrants vigilance," it had said.

RBI is targeting retail inflation under 6% in January 2016 and 5% by March 2017. Economists do not expect RBI to undertake another round of rate cuts before February given the positive gross domestic product growth numbers and the upward pressure on inflation.

India’s economic growth accelerated to 7.4% in the second quarter of 2015-16, as against 7% in the preceding three months.

Since January, RBI has cut key policy rates by 125 basis points. One basis point is one-hundredth of a percentage point.

Anubhuti Sahay, head, South Asia Economic Research (India), Standard Chartered Bank, said that both sets of data suggests a hardening of inflation.

“The base effect is turning unfavourable for both the price indices. The increase in food prices in November, especially pulses and vegetables, is reflected in both the measures," she said.

In November, retail inflation based on the consumer price index quickened to 5.41% from 5% in the previous month. Food inflation accelerated to 6.07% in November from 5.25% the previous month. Prices of pulses rose 46% in November, according to data released by the statistics ministry.

According to WPI data released by the commerce ministry, food articles inflation rose 5.2% in the month from 2.44% in October. The fuel and power index came in at -11.09%, from -16.32% in the previous month, in a signal that imported inflation is again on the rise. Manufactured products inflation was at -1.42% as against -1.67% in the previous month. The government also revised the wholesale inflation data for September to -4.59% from -4.54% reported earlier.

“Going ahead, the impact of lower commodity prices on WPI should also normalize. While lower global crude prices will continue to have a positive effect on inflation, the impact on inflation will be much lower. This is because global crude oil prices are falling but unlike earlier, the fall in prices is much less," Sahay said.

India’s crude oil basket price fell to $35.72 on 11 December, the lowest since July 2004, according to the ministry of petroleum and natural gas.

DBS Bank, in a report, said the gradual upticks in inflation readings are likely to persist on fading base effects and bounce in food price indices. “Against the backdrop of rising fiscal commitments and a go-slow on the reform agenda, the central bank adopted a cautious tone in December. The US Fed rate trajectory will also be the other crucial input for the next review. Sum of these factors suggests that the RBI will extend its on-hold stance to the early-February 2016 rate meeting," it said.

Aditi Nayar, senior economist at rating agency ICRA, said that retail inflation will remain within RBI’s comfort levels.

“The expected reversal in prices of some perishables and pulses; the likely softness in global crude oil prices and, consequently, domestic fuel prices; as well as the waning of the adverse base effect would contribute to keeping CPI inflation largely steady at current levels during the remainder of FY 2015-16," she said.

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