India’s CPI Exceeds Estimates, Reducing Room for Rate Cuts

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India’s inflation accelerated more than estimated, decreasing room for central bank Governor Raghuram Rajan to cut interest rates again to boost investment.

Consumer prices rose 5.4 percent in June from a year earlier after a 5.01 percent increase in May, the Statistics Ministry said in a statement in New Delhi on Monday. The median of 35 estimates in a Bloomberg survey of economists had predicted a 5.1 percent gain.

The Reserve Bank of India will continue to look at whether monsoon rainfall is enough to keep crop prices in check, Rajan said on July 2. The nation gets more than 70 percent of its annual rainfall from June to September.

A reduction in one of Asia’s highest borrowing costs may help spur new investment from a one-year low. Rajan, who will next review monetary policy on Aug. 4, is seeking to keep inflation below a 6 percent target in January.

“We had expected the low base effect to wean off by August, but it appears that has started to happen earlier,” said Tirthankar Patnaik, chief strategist at Mizuho Corporate Bank Ltd. in Mumbai. “We continue to maintain expectations of one rate cut in the January-March quarter and nothing before that.”

Food Prices

Most economists in another Bloomberg survey ditched predictions for a rate cut early next year and now see Rajan keeping the benchmark repurchase rate at 7.25 percent through September 2016. Swap traders see a cut to 7 percent this year.

Rajan reduced rates last month for the third time in 2015 and said the monsoon will be key to further easing after the government’s weather bureau forecast below-average rains. The June-September showers, which water more than half of India’s farmland, were 2 percent below normal as of July 10.

Food accounts for about 50 percent of India’s CPI basket. The central bank’s inflation target adds pressure on Prime Minister Narendra Modi’s government to ensure a steady supply of food to keep a lid on prices.

Food prices rose 5.48 percent in June from a year earlier after a 4.8 percent gain in May, led by a 22 percent surge in pulses, Monday’s data show.

The yield on the 10-year sovereign bond rose to a two-week high on Monday before the data and the rupee weakened 0.2 percent.

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