By Shubham Batra and Nikunj Ohri
NEW DELHI, Sept 14 (Reuters) – India’s annual retail inflation accelerated further in August as price pressures spread beyond food and transport, strengthening the case for a rate hike by the central bank next month.
The August print of 4.82% was marginally higher than a 4.80% inflation that the economists were expecting in a Reuters poll and 4.45% in the previous month. It was also the highest under the new series which began in January.
Asia’s third-largest economy continues to be an outlier among regional peers for not tightening monetary policy, while peers as Indonesia and the Philippines have raised rates in response to higher energy prices and currency volatility.
The central bank left its benchmark policy rate unchanged at 5.25% last month, but minutes of its last monetary policy meeting showed that some Reserve Bank of India officials, including Governor Sanjay Malhotra, favoured a rate hike if inflation spread across segments.
“Our base case is that a rate hike could materialise in the December 2026 meeting, particularly if there is evidence of a generalisation in inflationary pressures and crude oil prices sustain at elevated levels,” said Aditi Nayar, chief economist at rating agency ICRA.
Nayar, however, added that the central bank could raise rates at its next meeting in October if crude oil prices remain elevated.
The central bank last raised rates in February 2023.
INFLATION BEYOND FOOD, FUEL
India imports nearly 85% of its oil needs, more than half of it from the Middle East, where the U.S.-Iran war has caused major supply disruptions.
A sustained rise in global oil prices threatens to add to inflation pressures, with Brent crude futures near $108 a barrel.
Reflecting fuel price pressures, transport inflation accelerated to 4.60% in August from 4.43% in the previous month even though the government-owned fuel retailers have not adjusted selling prices for petrol and diesel lately.
In addition, India’s food inflation climbed to 5.95% in August from 5.52% in July on the back of weak monsoon showers, with sharp increases in prices of staples such as ginger, onion and garlic.
Price pressures are now reflecting elsewhere too.
Inflation ran close to or above 4% in categories including clothing, household goods and education, while inflation in food-serving services rose to 8.41% from 7.75% in July.
“Price pressures will likely continue rising in the coming months, moving above 5% and breaching the RBI’s 6% upper tolerance limit in Q4,” said Alexandra Hermann Prasad, lead economist at Oxford Economics in London.
Rate panel members said they would watch for generalisation of price pressures in making a call on raising rates, according to minutes of the last meeting.
Core inflation, which excludes volatile food and fuel components and is seen as a gauge of underlying demand pressures, rose to 4.2% in August, according to Sakshi Gupta, principal economist at HDFC Bank, as against 3.86% in July.
TIGHTER MONETARY POLICY
Signs of the central bank’s discomfort with easy monetary policy conditions emerged last week when it said it would sell bonds from its balance sheet to absorb surplus liquidity.
RBI will sell bonds worth an aggregate of 1 trillion rupees ($10.47 billion) in the next fortnight starting on September 16.
Kotak Mahindra Bank’s chief economist Upasna Bhardwaj said she continues to see scope for 50-75 basis points of rate hikes by the monetary policy committee, with now the odds of an action in its next meeting in October “increasing significantly”.
(Reporting by Shubham Batra and Nikunj Ohri in New Delhi; Additional reporting by Anuran Sadhu in Bengaluru; Editing by Vijay Kishore and Nivedita Bhattacharjee)
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