India CPI Tops Estimate in Test for Rajan as Industry Moderates

India’s consumer-price inflation quickened more than economists estimated, adding pressure on central bank Governor Raghuram Rajan to keep interest rates elevated even after factory output slowed.

The consumer-price index rose 7.96 percent in July from a year earlier, compared with a upwardly revised 7.46 percent in June, the Statistics Ministry said in New Delhi today. The median estimate in a Bloomberg News survey of 43 analysts was for a 7.4 percent increase. Industrial production rose 3.4 percent in June compared with a 5.6 percent gain predicted in a separate survey and a revised 5 percent in May.

Finance Minister Arun Jaitley backed Rajan’s Aug. 5 decision to keep the benchmark rate unchanged at 8 percent for a third meeting as below-normal rainfall threatens to stoke Asia’s fastest inflation. The highest borrowing costs among the region’s largest economies risk damping growth that’s essential to narrow the budget deficit to a seven-year-low.

“There are uncertainties along the way including geopolitical risks and the monsoon,” Shubhada Rao, an economist at Yes Bank Ltd. in Mumbai, said before the data. “There are challenges to the central bank target of 6 percent which will require improved supply side measures and a dominant role played by fiscal policy.”

Rajan plans to slow consumer-price inflation to below 8 percent in January 2015 and 6 percent the following year. While the nearest goal is “well within reach,” there are upside risks to the longer-term target, he said this month.

Budget Deficit

The benchmark S&P BSE Sensex gained 1.4 percent in Mumbai today, the yield on the 10-year sovereign bond rose to 8.62 percent from 8.59 percent and the rupee strengthened 0.2 percent to 61.09 per dollar.

The currency has pared this year’s gains after Jaitley refrained from cutting subsidies and expenditure in his first budget. He’s instead banking on a boost in tax revenues to bridge the budget shortfall.

Plans to narrow the deficit to 4.1 percent of gross domestic product are on course, Jaitley told reporters at a joint briefing with Rajan on Aug. 10. Data showing the April-June gap was 56.1 percent of the full-year target was skewed as there were debts outstanding from the previous year and tax collections haven’t picked up, he said.

The central bank is in discussion with the government to approve a monetary policy framework that will adopt a formal CPI target, Rajan said at the same briefing. A Reserve Bank of India panel proposed adopting a 4 percent CPI target by 2016 plus or minus two percentage points as part of an overhaul that would also establish an independent monetary policy committee.

Weak Monsoon

Monsoon rains, which account for more than 70 percent of annual rainfall and water about half of India’s farms, are the main threat to inflation. Rainfall was 17 percent below average as of Aug. 11, according to the nation’s weather office, putting India on course for its driest year since 2009.

A crop failure can spur consumer prices in the world’s second-most populous nation, where food accounts for about 50 percent of the CPI basket. The government has sold 25 percent of its rice and wheat stocks in the domestic market since June, ordered a crackdown on hoarders and set minimum export prices on onions and potatoes to discourage overseas sales.

Wholesale prices probably rose 5.1 percent in July from a year earlier, according to the median of 42 estimates in a Bloomberg survey before data due Aug. 14.

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