India’s headline inflation picked up for the first time in five months on higher food prices, giving the central bank a reason to hold off on a much-awaited interest rate cut when it reviews its policy on Thursday. The wholesale price index, India’s main gauge of inflation, edged up 6.95 per cent in February from a year earlier.
Wednesday’s data, released by the government, was higher than the 6.79 per cent average forecast in a Reuters poll, after a provisional rise of 6.55 per cent in January.
The Reserve Bank of India (RBI) meets on Thursday to review its policy, where it is widely expected to leave its main lending rate steady at a 3-year high of 8.5 per cent.
However, weakening economic momentum as well as a softer policy stance adopted by central banks in the region is piling pressure on Governor D Subbarao to start cutting rates sooner than later.
“I think the big risk going forward for inflation will be driven by the revision in the domestic fuel prices, and we do expect inflation to sustain around 7 per cent until March,” said Abheek Barua, chief economist at HDFC Bank in New Delhi.
“The broad balance is in favour of a rate cut, but I would think the Reserve Bank of India would wait until it gets a firm fix on the contours of the budget (on March 16).”
India’s economic growth faltered to a three-year low of 6.1 per cent in the quarter ended December as a political logjam and the central bank’s hawkish policy against inflation hit investment.
The pace of economic expansion this fiscal year is forecast to dip below 7 per cent for the first time in three years.
Most economists expect interest rate cuts to begin in April-June quarter, but the central bank’s surprise move last week to cut the cash reserve requirements for banks has increased the odds for a rate cut on Thursday.
Federal bond yields and swap rates remained unchanged after the February inflation data.
Annual food prices in February rose 6.07 per cent after falling 0.52 per cent a month ago, as prices of vegetables spiked.
Manufacturing inflation -a barometer for demand-driven price pressures -eased to 5.75 per cent from 6.49 per cent in January.
Fuel prices rose 12.83 per cent from a year earlier, lower than an annual rise of 14.21 per cent in January.
Fuel inflation has been largely steady despite an upswing in global crude prices, as political considerations have forced the government to delay an adjustment in petroleum prices, forcing state-owned oil refiners to take on the brunt of higher prices.
But with the government facing an arduous task of trimming its fiscal gap, it will be difficult for New Delhi to defer a decision aligning pump rates with global oil prices for long.