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India’s economic worries mount as inflation quickens, industrial output shrinks
Photo Credit: VCCircle

India's retail price inflation in November jumped to a 40-month high on higher food prices, reducing the likelihood of the central bank cutting interest rates in the next policy meeting in February.

Food inflation rose sharply as unusually heavy rains at the end of the monsoon season hit crop yields and caused a spurt in prices of vegetables such as onions.

This is the second month in a row when the retail inflation has remained above the central bank's medium-term target of 4%.

Annual retail inflation increased to 5.54% last month, faster than the 4.62% rate in October and ahead of 5.26% forecast in a Reuters poll of analysts.

Increasing inflation and the growth rate slipping to a more than six year low of 4.5% in the July-September period could make policy makers and the Reserve Bank of India walk a tight rope in the coming months.

Already concerns on the inflation front prevented the Reserve Bank of India from cutting its key lending rate for the sixth straight time earlier this month, despite slashing its growth rate forecast for 2019-20 to 5%, which would be the lowest since the 2008 financial crisis.

Economists said that the central bank would continue to hold the rates.

"With the likely bottoming of growth and elevated inflation as well as concerns on large fiscal slippages, the policy rate (by RBI) may remain in hold in FY20," said Sujan Hajra, chief economist at Anand Rathi Securities

Retail food prices, which make up nearly half of India's inflation basket, increased 10.01% in November from a year earlier, against 7.89% in October.

Four analysts said November core inflation, which strips off food and fuel prices to reflect the demand in the economy, remained flat at 3.40%-3.6% against 3.44%-3.60% in October.

Weak demand is reflected in the power, fuel, real estate and sales of vehicles, which heave resulted in hundreds of thousands of job losses in some industries.

Economists expect the government to loosen its fiscal deficit target to further provide stimulus for the economy by cutting tax rates for individuals, having already cut corporate tax rates to increase investment in the economy.

Factory output shrinks

India's industrial output contracted 3.8% in October from a year earlier, government data showed on Thursday.

Analysts polled by Reuters had forecast October industrial output to fall 5%.

The cumulative growth in April-October over the corresponding period of the previous year was 0.5%.

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