India's wholesale prices rose faster-than-expected in November, and analysts said inflation worries could see the central bank withdraw more liquidity support in coming weeks and raise rates early next year. The wholesale price index rose 4.78 percent in November from a year earlier, mainly due to a surge in food prices after the worst monsoon rains since 1972 and then flooding in parts of the country hurt summer crops, data showed on Monday.
The rate compared with a median forecast of 4.14 percent in a Reuters poll of 21 analysts and October's 1.34 percent. "Higher food prices firm up inflation expectations. Besides, food inflation has been high since 2006, long before the drought," said Ramya Suryanarayanan, an economist at DBS in Singapore. "We expect a 25 basis points hike in repo, reverse repo and CRR (cash reserve ratio) by end-January, and after this data, it looks all but certain to us."
The benchmark 10-year bond yield edged higher to 7.56 percent after the data from 7.54 percent. The 30-share BSE index trimmed gains to be up 0.7 percent at 17,240.69 points from up about 0.83 percent beforehand. The central bank, which slashed banks' reserve requirements and cut its key lending rate by 425 basis points during the worst of the global crisis, began scaling back stimulus at its October policy review by removing some liquidity support measures.
While rising inflation is mainly driven by a surge in food prices, the data showed prices of manufactured products have also started rising as economic activity has picked up. Industrial output grew 10.3 percent in October from a year earlier, on robust consumer demand and government's stimulus spending, and annual growth in the September quarter was the fastest in 18 months. "(The rise in manufacturing inflation) is clear evidence of inflation climbing up in November on the back of not just primary articles but also manufactured products," said Shubhada Rao, chief economist of YES Bank.
"Firming inflation will be on RBI's radar and we maintain our earlier call of a CRR hike in December," she said. Food prices are politically sensitive in India and even though monetary policy can do little to influence them, Reserve Bank of India officials have flagged concern that rising food costs could fan inflationary expectations. Wholesale prices have already risen 7.5 percent from the beginning of the 2009/10 financial year that started in April. "Comments last week from (RBI) Governor Subbarao about the potential impact of food prices on inflationary expectations provide a clear signal that the RBI is preparing the ground for rate hikes starting early next year, and today's numbers should reinforce the case for such a move," said Brian Jackson, an economist at Royal Bank of Canada in Hong Kong. Jackson expects rates to rise 75 basis points in the first quarter of next year.
Analysts have predicted inflation could climb to as much as 8 percent by the end of the fiscal year in March, above the central bank's perceived comfort zone of around 5 percent. The central bank left its key rates steady in October. It holds its next policy meeting in late January, but it can adjust monetary policy at any time.
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