A pick-up in retail inflation to its fastest pace on record will likely force Reserve Bank of India chief Raghuram Rajan to raise interest rates for a third time on Wednesday, crimping growth prospects for an already fragile economy.
Eight out of 10 analysts in a straw Reuters poll on Friday said they expected the central bank to raise the repo rate by 25 basis points to try and tame stubbornly high inflation. The other two analysts also said the odds had increased for a rate hike.
Annual retail inflation accelerated to 11.24 per cent in November from 10.17 per cent the previous month.
The near-consensus on a rate hike comes even as the central bank faces the prospect of a flagging economic recovery.
Industrial production output shrank 1.8 per cent year-on-year in October, dampening sentiments after recent purchasing managers' index (PMI) and gross domestic product data had suggested the economy may have bottomed out.
Nomura said that the latest CPI data paints a stagflationary picture of the economy, where inflation remains elevated despite weak growth.
Rajan said the central bank was "very uncomfortable" with the current level of inflation.
Bonds, rupee and stocks fell on Friday, both on the data shock and the governor's remarks.
No choice left?
"We think today's inflation surprise is far more substantial than the lackluster IP (industrial production) data, and the RBI would have no choice (but) to raise the policy interest rates," Deutsche Bank said in a note on Thursday.
Sonal Varma, economist at Nomura, also now expects a rate hike next week, thanks to the inflation data surprise.
While many analysts expect food prices - the dominant factor pushing up retail inflation - to ease in coming months, most admit the upside risks to both retail as well as wholesale price inflation have gone up.
India's WPI inflation for November - the data is due on Monday - is seen growing at 7 per cent year-on-year.
"What does RBI do against this backdrop? A modest uptick in the CPI inflation might have allowed the central bank to bide time in December, but the elevated print has set up a challenging backdrop," DBS said, adding a 25 basis point rate hike is likely next week.
If there's a rate of that size next week, the new RBI governor will have undone the 75 basis points of cuts made this year by his predecessor Duvvuri Subbarao.