A farm worker cuts wheat by hand during a crop harvest in Sonepat, Haryana, India. (Photographer: Prashanth Vishwanathanan/Bloomberg)

Turning Hawkish on India as Inflation Zooms Past RBI Target

(Bloomberg) -- India’s inflation surged past the central bank’s target, bolstering a view that interest rates may rise earlier than expected and offering little relief to battered bond markets.

Consumer prices rose 4.9 percent in November from a year earlier as food and fuel costs surged, the Statistics Ministry said in a statement on Tuesday. That’s the fastest pace in 15 months and exceeds all estimates in a Bloomberg survey, pushing the yield on the 10-year sovereign bond to the highest since July 2016 when markets reopened Wednesday.

"Bond prices are suggesting a rate hike is almost a done deal," said Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset Management in Mumbai. "How soon you expect a rate hike, that’s what you have to ask."

Economists at Rabobank forecast an increase as early as the second quarter of 2018 even as IDFC Asset’s Choudhary predicts a "prolonged pause." The view dashes lingering hope for easing from government advisers seeking to spur below-potential growth, and may come as a blow to Prime Minister Narendra Modi whose party faces a close contest in elections in his home state on Thursday.

Turning Hawkish on India as Inflation Zooms Past RBI Target

Investors will get an insight into the Reserve Bank of India’s thinking when it publishes minutes of its latest meeting on Dec. 20. By then, they’ll also have clarity on public opinion about Modi’s policies, because state election results are due Dec. 18.

Factory output rose 2.2 percent on year in October, another set of data showed Tuesday, less than the 2.9 percent survey estimate. The numbers highlight persisting signs of weakness, which Bloomberg economist Abhishek Gupta said raises concern about "stagflation."

Bloomberg Economics: Calls for More Rate Cuts Likely to Be Less Vocal

ICRA Ltd. said India’s core inflation recorded a broad-based uptick to an eight-month high of 4.9 percent in November, from 4.6 percent in October. The yield on the 10-year sovereign bond rose 5 basis points to 7.24 percent as of 11:45 a.m. in Mumbai, and the rupee fell 0.1 percent to 64.45 a dollar.

RBI Governor Urjit Patel left the benchmark repurchase rate at 6 percent last week and reiterated commitment "to keeping headline inflation close to 4 percent on a durable basis." He’s betting that previous cuts and a $32 billion recapitalization plan for state-run banks will help jumpstart lending, boost growth and possibly narrow a yawning output gap in 2018. That’s in line with forecasts from Goldman Sachs Group Inc., which is calling for three rate increases by mid-2019 as growth and inflation picks up.

Rabobank sees tightening that is steeper and faster. "The RBI will continue to raise rates until it reaches 7.25 percent in the second quarter of 2019," said Hugo Erken, senior economist at Rabobank in The Netherlands.

Costlier Food

Turning Hawkish on India as Inflation Zooms Past RBI Target

Bloomberg’s Gupta expects rebounding food prices to stoke inflation in December, forecasting the headline rate will rise to about 5.2 percent from a year ago.

However, some economists such as Shubhada Rao at Yes Bank Ltd. in Mumbai predict food costs will ease in the months ahead. The RBI is due to next review policy over Feb. 6-7 and swap traders are pricing in a 47 percent probability of an interest-rate increase with a 53 percent chance of a hold.

"There is an upside risk to inflation from here on and that will be disappointing for bond markets," said Madhavi Arora, an economist at Kotak Mahindra Bank Ltd. "For the RBI, we expect them to be relatively hawkish, but do not think they will hike rates just yet."

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