A customer hands over an Indian fifty rupee banknote to a vendor at the Laxmanrao Yadav vegetable market in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

India CPI Inflation Rises In April Giving Policy Hawks More Firepower 

Retail and wholesale prices in India rose in April giving the monetary policy committee more reason to consider a hawkish stance at its meeting next month.

Consumer price inflation stood at 4.58 percent in April, overturning a three month slide from its peak, according to data released by the Central Statistics Office. Economists polled by Bloomberg had expected CPI inflation at 4.41 percent. Wholesale prices in April also touched a four-month high of 3.18 percent due to rising crude oil and food prices.

India's six-member MPC has held benchmark interest rates at 6 percent since June 2017, with a neutral stance, as inflation remained moderate and the growth recovery remained tentative. Now, with confidence in the economic recovery strengthening and inflation rising, the MPC may need to consider a change in stance and an eventual increase in interest rates.

Sticky core inflation – that strips out food and fuel – and the recent surge in crude oil prices could add to the MPC’s concerns as it attempts to keep CPI inflation 4(+/-2) percent target. In April, core inflation rose to a 44-month high of 5.9 percent, said Shubhada Rao, chief economist at Yes Bank in a note.

“The housing and rising oil prices are likely to keep pressure on headline inflation in coming months,” said Devendra Kumar Pant, chief economist at India Ratings & Research. "However, a normal monsoon and moderate food inflation may act as a counter. This may result in RBI maintaining status quo on policy rates in its June 2018 monetary policy review," he said in a note.

The trajectory of RBIs policy in remainder of FY19 will be governed by the movement of oil prices.
Devendra Kumar Pant, Chief Economist, India Ratings & Research

Already, two members on the committee – RBI deputy governors Viral Acharya and Michael Patra – are leaning towards a hawkish policy stance to rein in inflation. Both flagged off risks from core inflation. RBI governor Urjit Patel said he'd wait and watch to see how the risks to inflation evolve.

Acharya also pointed out that prices had softened in the first three months of 2018 due to the seasonality in vegetable prices but that’s just “largely noise” from an interest-rate setting perspective, according to his statement in the minutes of the MPC’s April meeting. What was of greater concern, he had added, was the sticky core inflation “given its persistence”.

The MPC expects inflation to remain between 4.7-5.1 percent in the first half the new financial year.

Inflation is expected to rise further as global crude oil prices continue to firm up and the hike in MSP adds to food inflation, said Yes Bank’s Rao. "The positive support could come only if we have a solid monsoon performance giving a bumper food grain output,” she said.

This is the last inflation reading that the six-member group will consider before its meeting in June.

The rise in inflation has the bond market worried. India’s 10-year bond yield rose sharply after the wholesale inflation numbers were released earlier in the day and closed at 7.82 percent.