Rising food prices pushed India's retail inflation to a 17-month high in December, breaching the central bank's medium-term target for the second straight month, which could intensify pressure for it to raise policy rates in the next few months.
India's measure of consumer price inflation, the CPI index, rose 5.21 percent in December from a year earlier, the Ministry of Statistics said on Friday.
Analysts polled by Reuters had predicted December's consumer inflation rate would climb to 5.10 percent, the highest since July 2016, from 4.88 percent in November.
Annual retail food inflation rose 4.96 percent in December from 4.35 percent in the previous month.
Meanwhile, the country’s industrial output grew 8.4 percent in November from a year earlier, government data showed.
Economists surveyed by Reuters had forecast 4.4 percent growth in output compared with a downwardly revised 2.0 percent year-on-year increase in October.
The Reserve Bank of India held its policy rate steady at 6.0 percent last month and said all possibilities were on the table, depending on how price pressures and growth panned out.
The RBI, which has a medium-term inflation target of 4 percent, has raised its inflation estimate to 4.3 percent to 4.7 percent for the six months through March. But some analysts feel inflation could overshoot its estimates.
The RBI holds its next policy review on February 7.
Sunil Sinha, principal economist at India Ratings, said the RBI was unlikely to change its policy stance soon.
"If the inflation pressure continues beyond this level, one can expect the central bank to change its policy stance to hawkish," he said.
Rising inflation amid firm global crude oil prices is a major worry for Prime Minister Narendra Modi ahead of his last full-year budget, due on February 1, as he hopes to win a second term in 2019.
Analysts said any sharp rise in state spending in the budget that fuels inflation could force the central bank to raise rates earlier than expected.
The US central bank is forecasting three rate hikes for 2018. It raised rates three times last year.
While the world's seventh largest economy is expected to grow at 6.5 percent in the current fiscal year ending in March, a continued rise in inflation from 1.46 percent in June, the lowest on record since 2012, has alarmed policymakers in New Delhi.
Crude prices have rallied, sending Brent crude above $70 a barrel on Thursday for the first time since December 2014, a worry that India imports most of its energy needs.
Despite a cut in taxes, retail petrol prices have risen 5.6 percent and diesel by 9 percent since June in the Indian capital.
Expert comments:
Tirthankar Patnaik, India strategist, Mizuho Bank, Mumbai
"It's slightly higher than our estimate. We believe that current rate easing cycle by the central bank is over for now. And, with inflation expected to continue to taper up all the way until the middle of the year, we do not expect any kind of changes in the policy rate until the end of the year."
Tushar Arora, Senior Economist, HDFC Bank, New Delhi
"The number is in line with our expectations. Going ahead, consumer inflation is likely to rise further and move close to a 6 percent level by the summer. This could spark fears of a rate hike and be unsettling for the markets. However, the central bank could still stay put in the near term, so as to wait and see if the inflationary pressures are temporary or permanent in nature."
Sumedh Deorukhkar, Senior Economist, BBVA, Hong Kong
"Looking ahead, we think that risks to inflation are tilted to the upside, at least over the next two quarters."
"Seeking greater clarity on the growth-inflation dynamic, we expect RBI to maintain status quo on rates and a neutral policy guidance in 2018."
Radhika Rao, Group Economist, DBS, Singapore
"Food and fuel inflation has driven up the headline, with core converging with the headline."
"The CPI trajectory is likely to track higher than the RBI's fan chart for the quarter, turning focus on policy direction."
Anjali Verma, Economist, PhillipCapital India, Mumbai
"CPI is lower than what I was expecting. There's a sharper drop in food inflation than what I was anticipating. That is what had led to the CPI number being lower than our expectation. The rest is all in line with our expectations. This should not make any difference to the RBI, which is expected to stay on hold."
"While it is in line with consensus, the drop in food inflation, I think, will be taken as a slight positive from the bond yield point of view, because in general the worry was that food inflation will not reverse even when this is the time for it to reverse."
