India’s inflation breaches central bank’s 6% limit, bolsters case for rate hikes

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Bond market showed muted reaction to the data, with the 10-year yield holding at 7.25%

India’s retail inflation surged to 6.09 per cent in October, breaching the central bank’s 6 per cent limit for the first time under the new series, as rising food prices squeezed household budgets and raised bets on further rate hikes.

Inflation has stayed above the Reserve Bank of India’s 4 per cent medium-term target for five straight months and had last breached 6 per cent two years ago under an earlier CPI series.

“The data reinforces our expectation of a second successive rate hike in December,” said Radhika Rao, senior economist and executive director at DBS Bank, adding that inflation is yet to peak.

Last month, the RBI joined global peers by raising its benchmark repo rate for the first time in nearly four years, citing elevated inflation expectations and broadening of price pressures.

Aditi Nayar, chief economist at rating agency ICRA, said a further 25-basis-point hike in December appeared “almost certain”. India’s policy rate stands at 5.50 per cent.

Economists had forecast inflation to rise to 5.93 per cent in October from 5.54 per cent in September, according to a Reuters poll.

The October print was driven largely by food prices, which account for nearly 40 per cent of India’s consumer price index. Food inflation rose to 8.94 per cent in October from 7.74 per cent in September as prices of staples such as onions, garlic and ginger climbed.

The bond market showed a muted reaction to the data, with the 10-year bond holding at 7.25 per cent as traders maintained bets on about 100 basis points of rate hikes.

The rupee, which has recovered in November after threatening to breach record lows last month, is getting help from lower oil prices and a rebound in foreign portfolio inflows.

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