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India CPI Surge to 8-Year High Fuels Rate Hike Expectations

·2 min read

(Bloomberg) -- India’s headline inflation accelerated for a seventh month to the fastest since May 2014 on higher fuel and food costs, sending bond yields higher and spurring expectations the central bank will raise rates further to tame prices.

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Consumer prices increased 7.79% in April, the Central Statistics Office said in a statement Thursday. That compares with a 7.42% gain predicted in a Bloomberg survey of economists and 6.95% the previous month.

Inflation has been running ahead of the Reserve Bank of India’s 2%-6% target range for four straight months. Governor Shaktikanta Das has since last month stressed the need to prioritize slow price gains over supporting growth, and the bank announced a surprise rate hike last week.

The stage is set for a likely further rate hike at the RBI’s next meeting in June, when it’s also expected to revise up its 5.7% inflation forecast for the current April-March fiscal year.

“Substantial policy catch-up is still needed,” Sonal Varma and Aurodeep Nandi at Nomura Holdings Inc. wrote in a note Friday, adding that they expect a 35 basis point interest rate increase in June.

Bonds yields rose as traders priced in front-loaded rate hikes. The benchmark 10-year yield increased 9 basis points to 7.33%. The rupee, which hit a record low on Thursday, advanced 0.1% to 77.38 to a dollar.

High inflation may force the RBI to raise rates by 75 to 100 basis points over the course of the fiscal year, said Gaurav Kapur, chief economist at IndusInd Bank Ltd. in Mumbai. Inflation will likely stay above 6% until September, he added.

“They will front-load hikes,” said Pankaj Pathak, fixed income fund manager at Quantum Asset Management. “We should expect more in June and August, after that they may be more careful and watch the inflation trajectory and react.”

According to Thursday’s release, consumer food prices rose almost 8.4% while fuel gained about 11%.

More Details: India’s April Consumer Prices Rise 7.79% Y/y; Est. 7.42%

Radhika Rao, senior economist at DBS Bank Ltd. in Singapore, said in a note that she expects May inflation to “stay on the firmer end” of 6.5% to 7%, and sees 150 basis point cumulative increases for the year, including the 40 basis point hike last week.

Nomura economists wrote in their note that they expect inflation to average 7.2% in the fiscal year to March, up from an earlier forecast of 6.9%, and expect it to hit about 8% during August-September.

(Updates market reaction in seventh paragraph.)

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