India's retail inflation accelerated to a 14-month high in November, driven up by higher food prices, underscoring the challenge the Reserve Bank of India (RBI) faces in meeting its medium-term inflation target.
The consumer price index (CPI), which the central bank closely tracks for setting lending rates, rose an annual 5.41 per cent last month. Retail prices were up 5 per cent on-year in October. The RBI aims to keep retail inflation to around 5 per cent by March 2017. But steep government pay hikes and irregular rainfall pose risks to that target.
"The broader theme really has been a considerable pick-up in food inflation and unwinding of the favourable base of last year, as well as stickiness in services inflation," said Madhavi Arora, economist at Kotak Mahindra Bank in Mumbai. In her view, the RBI will hold rates at least until March.
After easing monetary policy aggressively this year , the RBI earlier this month held the key repo rate at 6.75 per cent. While a crash in global commodity prices has tamped down prices in India, the central bank remains worried about elevated household inflationary expectations. Retail food price jumped an annual 6.07 per cent last month, faster than October's 5.25 per cent rise.
Monday's data came hours after the government reported a pickup in wholesale food prices. While overall wholesale prices declined an annual 1.99 per cent in November, their 13th straight fall, wholesale food prices gained 5.20 per cent on year compared with October's provisional 2.44 per cent rise.
Clouding the inflation outlook is the recommendation of a government panel for an average 24 per cent pay hike for millions of its employees, which would lift demand-driven price pressures. The RBI is also expected to contend with a potentially weakening rupee should outflows from emerging markets gather pace if, as widely anticipated, the Federal Reserve hikes US interest rates this week.
According to a Reuters poll earlier this month, the Indian rupee will weaken through next year.
In this backdrop, very few expect aggressive rate cuts. Economists polled by Reuters last month said the RBI was likely to trim the repo rate by another 25 basis points in the April-June quarter and then stand pat until at least the end of 2016.
