India's inflation barely budged in September, staying stubbornly outside the Reserve Bank of India’s (RBI) comfort zone and girding the market for another interest rate rise even as policymakers around the world mull easing rates to stimulate a weak global economy.
The RBI has raised rates a dozen times since March 2010, but price rises have not slowed.
The market has factored in one more rate rise this year, even if the RBI decides not to tighten rates at its next policy meeting on Oct. 25.
The bank has vowed to keep up its inflation fight despite heavy resistance from business leaders and politicians over an industrial slowdown and weaker investment demand.
After the data release, a deputy governor of the RBI, K.C. Chakrabarty, said inflation was still too high due to external factors, adding industrial production costs needed to come down to fight prices.
A jump in fuel prices drove the wholesale price index up 9.72 per cent versus a year earlier, government data showed on Friday, almost in line with a Reuters poll of analysts and inching up from 9.78 per cent in August.
"Even if regional policymakers shift towards an accommodative bias, India's unique circumstances, amidst structural bottlenecks, will make it difficult for the RBI to toe their line," said Radhika Rao, economist at Forecast PTE in Singapore.
"Steep depreciation in the rupee in Q3 also complicated the authorities' anti-inflationary stance, with 25 bps hike baked into the October rate meet," Rao said.
Other central banks in Asia and Latin America have turned dovish as growth weakens under the weight of debt problems in the United States and the euro zone. Indonesia jumped ahead of its neighbours on Tuesday with a quarter per centage point cut.
Not everybody expects India to raise rates again, however.
Pressure is mounting for a pause in monetary tightening that has pushed the repo rate to 8.25 per cent, the highest in three years.
India is usually more insulated from global headwinds because its growth is driven by domestic demand rather than exports.
On the inflation side, many warn monetary policy alone will not rein in prices that are being driven up by bottlenecks affecting food distribution as the growing middle-class consumes more meat and dairy products.
"On the supply side there is little momentum for reforms in agriculture to increase yields and on improving efficiency in the supply chain," Seema Desai of political risk analysts Eurasia Group said in a report.
Inflation has been compounded by weakness in the rupee, which has lost nearly 9 per cent so far this year and remains the worst performer among major Asian peers. The higher price of imported goods including oil has fed through to consumers.
The manufacturing sector in particular has been hard hit, with annual production growth down to low single digits for two consecutive months last quarter.
Meanwhile, government bond yields continue to rise as liquidity stays tight in the rupee money markets. Analysts suspect the central bank may be forced to inject funds either through open market operations or by cutting bank reserve requirements if the deficit in the short-term cash markets stays above its comfort limits for a long time.
The benchmark 10-year bond yield was at 8.78 per cent, after easing 1 basis point to 8.77 per cent immediately after the data was released.
