Oil Surge May Harden RBI Outlook After Indian Inflation Quickens

Updated on
  • Consumer prices rise 5.21 percent versus 5.1 percent estimate
  • Govt to unveil budget Feb. 1, central bank review due Feb. 7
DBS Bank Sees India's Inflation Above Target

India’s retail inflation accelerated more than estimated to a 17-month high and little respite is seen in the coming months amid a surge in oil prices, increasing the odds that borrowing costs will rise sooner than expected.

Consumer prices rose 5.21 percent in December from a year earlier, the Statistics Ministry said in a statement in New Delhi on Friday, faster than the 5.10 percent Bloomberg consensus. Sovereign bonds fell in extended trading hours on growing concerns about inflation and speculation the government will miss its deficit target for the year through March 2018 when it unveils its budget Feb. 1.

That will be followed by the Reserve Bank of India’s policy review Feb. 7, where most economists predict no change in rates. However swap traders are pricing in the possibility of an increase.

"We are expecting the Reserve Bank of India to retain its hawkish stance in the next few months, though we don’t see a rate hike anytime soon," said Anjali Verma, Mumbai-based economist at PhillipCapital. She added that higher fuel prices and poor monsoons could keep food prices elevated.

A sustained rise to $65 a barrel for crude oil, India’s biggest import, could add 30 basis points to annual inflation and a key measure of growth may weaken by 15 basis points, the RBI estimates. It currently forecasts inflation at 4.3 percent to 4.7 percent in the second half of the year through March 31, above the 4 percent medium-term target. Brent crude is now trading at about $69.

Real Wages Lag

The rise in inflation, though, is unlikely to translate into higher wages, given subdued demand for jobs in an economy which is forecast to grow at its slowest pace in four years.

While overall salary increases in India will outpace the rest of Asia-Pacific in 2018, if adjusted for inflation the raise will be much smaller and in fact lower than last year, according to Willis Towers Watson.

"Given the decreasing pattern in the year-on-year salary increases, Indian employees could very well see a single digit salary increase in 2018 for the first time since 2011," Sambhav Rakyan, the advisory firm’s data services practice leader for Asia Pacific, said in a report last month. "That would be slightly below our forecast.”

Lofty Expectations

Real wages lagging in India

Source - Willis Towers Watson

The 0 for 2018 represents N/A

While India’s overall employment outlook for January-March has improved since the twin policy shocks of demonetization and the consumption tax, most sectors are still weaker from the same period a year earlier, according to a survey by The ManpowerGroup.

A relative lack of job opportunities is also being reflected in educational loans, where bad-debt is rising. So-called non-performing assets were 7.7 percent of total advances in the sector for the year through March 2017 -- the highest in at least three years, lawmakers were told last month.

— With assistance by Manish Modi

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