‘Ugly’ India inflation puts RBI closer to rate hike

Bloomberg

India’s inflation accelerated more than estimated in April, providing ammunition to hawks in the central bank to tighten monetary policy and fuelling a selloff in bonds.
Consumer prices rose 4.6 percent in April from a year earlier, the statistics ministry said in a statement in New Delhi, higher than the 4.4 percent median estimate in a Bloomberg survey of economists. It was the first pick-up in inflation in four months.
The data — the final price print before the Reserve Bank of India’s next rate decision on June 6 — highlights the risks from surging oil prices in Asia’s third-largest economy. The central bank expects oil prices averaging around $78 a barrel to stoke inflation by 30 basis points.
The “inflation number is very ugly. It’s way above expectations,” said Rupa Rege Nitsure, chief economist at L&T Finance Holdings Ltd. in Mumbai, adding that fuel prices are a worry. The RBI, which aims to keep inflation around the 4 percent midpoint of its target band, will most likely raise rates, she said.
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, making 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.
The onshore swap markets are pricing in at least 50 basis points of interest 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.
According to Shubhada M Rao, chief economist at Yes Bank Ltd. in Mumbai, core inflation was at 5.9 percent — a 44-month high. That’s made the central bank uneasy about price pressures and the hardening in its stance on inflation led to a selloff in bonds in April. The yield on the 10-year sovereign note rose 5 basis points on Tuesday to 7.87 percent, the highest for benchmark debt since February 2016.
“With inflation increasing in April against our expectation for a drop and likely to increase further in May and June, the risk of a near term rate hike by the RBI has intensified. We now extend our risk scenario to a one-and-done hike by the RBI in either June or August,” says Abhishek Gupta, Bloomberg Economics.