India CPI Lowest in 2-1/2 Years as Monsoon Poses Threat

India’s consumer prices rose at the slowest pace since January 2012, easing pressure on central bank Governor Raghuram Rajan to keep interest rates elevated as he fights Asia’s second-fastest inflation.

Consumer prices rose 7.31 percent in June from a year earlier, compared with 8.28 percent in May, the Statistics Ministry in New Delhi said yesterday. That’s the slowest pace since the index was created and compares with a 7.7 percent median estimate in a Bloomberg News survey. The wholesale-price index increased 5.43 percent after a 6.01 percent gain in May, the Commerce Ministry separately reported yesterday.

Rajan signaled last month he’d ease monetary policy if consumer-price inflation was on pace to fall below 8 percent in January 2015, a glide path he adopted earlier this year. Finance Minister Arun Jaitley this month kept a target to lower the budget deficit to a seven-year low as a weak monsoon and rising fuel prices threaten to boost spending on subsidies.

“Both headline numbers have surpassed expectations, but the Reserve Bank of India has said they are focused on sequential momentum before taking any action on monetary policy,” said Rupa Rege-Nitsure, chief economist at Bank of Baroda in Mumbai. “The RBI will undertake an assessment of the monsoon in September, but even then I don’t expect any decisions on interest rates this calendar year.”

Jaitley Call

The economy is on course for below-8 percent inflation this year, Rajan said on July 10. He kept interest rates unchanged last month, saying risks to the central bank’s forecast of 8 percent consumer inflation by January 2015 are “broadly balanced.” The next policy review is due Aug. 5.

In an interview with the Times of India newspaper published today, Jaitley said interest rates are the RBI’s responsibility and should fall “once inflation starts moderating a little.” He added that Modi opposes higher taxes as a way of bolstering India’s finances.

“The ’bitter pill’ will not be in the shape of higher taxation,” Jaitley told Times of India. “It could mean that for utilities, the user will have to pay for what they use. Unless users pay, utilities can’t survive.”

In its first budget announced July 10, Prime Minister Narendra Modi’s government made curbing inflation one of its top priorities and retained the previous government’s fiscal deficit target of 4.1 percent of gross domestic product in the year through March 2015. Jaitley left revenue and expenditure targets largely similar to an interim budget in February.

Modi Budget

Modi’s government also said it would consult with the Reserve Bank of India on developing a “modern monetary framework.” Such a structure must include a CPI target and operational autonomy for the central bank, the finance ministry said in a July 9 report.

The rupee weakened 0.1 percent to 60.1225 per dollar as of 2:29 p.m. in Mumbai, while the benchmark stock index rose 0.6 percent and the yield on the 10-year sovereign bond fell to 8.75 percent from 8.78 percent.

Industrial production gained the most in 19 months in May, rising 4.7 percent from a year earlier compared with 3.4 percent the previous month, government data showed July 11.

Food prices rose 7.9 percent in the CPI basket in June from a year earlier, while fuel and energy costs accelerated 4.58 percent, yesterday’s data showed. India’s monsoon rainfall has been 41 percent below normal since June 1, the weather department said yesterday.

The threat of a “full fledged drought” will keep Rajan from lowering rates in 2014, economists at Bank of America Merrill Lynch, including Indranil Sen Gupta in Mumbai, wrote in a report yesterday. The lender, which earlier predicted an interest rate cut in December, said the government will continue to boost food supply and enforce measures to stop hoarding.

“It’s a matter of concern but until July is over we must keep our fingers crossed,” Jaitley said, referring to the risk of a drought. “Governments always have contingency plans.”

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