India's headline inflation in January accelerated to its fastest pace in more than a year, vaulting above the central bank's end-March inflation forecast and putting more pressure on the bank to raise borrowing rates. The inflation data comes on the heels of a 16.8 percent annual surge in industrial output in December.
But analysts say the Reserve Bank of India's next move is expected only after the February 26 federal budget and its policy response could depend on whether the government starts to roll back its stimulus measures. Markets have priced in a 25 basis points rate rise in April. "The inflation numbers may be uncomfortable and IIP (industrial output) may be strong, but I think the RBI will only go for action only in the April policy, said Rajiv Kumar, CEO of New Delhi-based think-tank ICRIER.
The wholesale price index rose 8.56 percent in January from a year earlier, its highest since November 2008 and accelerating from a 7.3 percent gain in December, data showed on Monday. In January, the central bank had raised the wholesale price inflation forecast for the current year to end-March to 8.5 percent from 6.5 percent.
Higher-than-expected government borrowing in the budget might hold off the central bank from aggressively raising rates as it would push up borrowing costs. Central bank governor Duvvuri Subbarao said on Saturday that government borrowing influences monetary policy.
"High fiscal deficit tends to dominate monetary decision making," said D.K. Joshi, principal economist with rating agency Crisil in Mumbai. "With the policy in the tightening mode, it is important to gradually exit from fiscal stimulus to reduce pressure on the government borrowing."
January's inflation beat analysts' forecast of an 8.2 percent annual rise in a Reuters poll. The government on Monday also revised up the headline number for November to 5.6 percent from 4.8 percent, a sign of even more inflationary pressure. The rise was driven by a 17.4 percent jump in food prices, which rose because of weak monsoon rains and flooding. Inflation in manufacturing picked up to 6.55 percent from about 5 percent in December, a sign that inflationary pressures were spreading to other sectors of the economy.
India's federal bond yield edged down 4 basis points. At 0712 GMT, the yield on the benchmark 10-year bond was at 7.92 percent, after rising to 7.97 percent earlier in the day, its highest since October 15, 2008. It last ended at 7.86 percent on Thursday. Indian financial markets were shut on Friday for a holiday. The Reserve Bank of India is widely expected to raise borrowing rates at its April review after it surprised markets with a bigger-than-expected rise in banks' cash reserve requirements in January.