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Further interest rate cuts unlikely after inflation rises for second consecutive month.
India’s inflation rate rose faster than analysts’ expectations in June, official data showed Monday, dampening hopes of further interest rate cuts by the country’s central bank later this year.
Consumer prices increased 5.40 percent last month from a year earlier, according to the statistics ministry, higher than the 5.10 percent gain predicted by a Bloomberg survey of 35 economists. The figure was up from the 5.01 percent recorded in May and marked the second consecutive month that inflation has risen, with food prices climbing during India’s summer monsoon.
“Rate action by the Reserve Bank of India (RBI) will now depend upon how rains pan out and international events,” said Devendra Pant, chief economist at India Ratings and Research. Pant said the central bank would keep a close eye on how China’s recent stock market slump played out, along with an expected rate hike by the United States Federal Reserve later this year.
RBI governor Raghuram Rajan has made keeping inflation below six percent a target, but has already cut interest rates three times this year in a bid to inject life into the economy. India’s Prime Minister Narendra Modi came to power last year pledging to revive the economy and boost foreign direct investment, and in May India posted growth of 7.5 percent for the first three months of the year, overtaking China’s rate.
But on Friday, industrial output figures showed that elements of the economy remained sluggish, with production in key economic sectors—factories, mines and utilities—rising just 2.7 percent.
Rajan may face pressure to slice another 25 basis points off the key benchmark rate before the end of the financial year in March if food prices stabilize during the monsoon, which ends in September. He has signaled that the bank will only cut again if “space is provided” by key data including retail inflation.