India’s retail inflation accelerates to 7 per cent year-on-year in August

India’s retail inflation accelerated to 7 per cent year-on-year (Y/Y) in August, driven by a surge in food prices, adding pressure on the central bank to further hike interest rates later this month.

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) has raised the benchmark repo rate by 140 basis points since May to 5.4 per cent, including 50 basis points last month, aiming to curb consumer demand.

Annual consumer price index-based inflation in August was higher than expected, data released by the National Statistics office showed, compared to the 6.9 per cent forecast in a Reuters poll of economists, and above July’s 6.71 per cent.

Food inflation, which accounts for nearly 40 per cent of the CPI basket, rose 7.62 per cent year on year in August, compared to a revised 6.69 per cent in July.

The government has imposed curbs on exports of wheat, sugar, and rice to cool local prices as it is worried over the shortfall in rainfall in some parts of the country could drive up food prices.

The MPC will hold its next monetary policy meeting on Sept. 30, and is widely expected to raise the repo rate by 25-50 basis points, economists said.

Shaktikanta Das, RBI governor said earlier this month that retail inflation had peaked and was expected to moderate to around 5 per cent by the April-June quarter of the next year, citing a fall in international crude oil and other commodity prices.

The rise in food and fuel prices has severely hit poor households.

“We have cut down spending on vegetables,” said Puspanjali Sahu, a resident of the eastern Indian city of Bhubaneswar. “We are not going out to any eatery, we are not watching movies in the cinema hall.”

Meanwhile the Indian shares rose for the third straight session on Monday, lifted by gains in technology and metal stocks, while investors awaited domestic inflation data for cues on the pace of the central bank’s rate hikes.

The NSE Nifty 50 index, with most of its major sub-indexes in the positive territory, closed 0.58 per cent higher at 17,936.35, and the S&P BSE Sensex rose 0.54 per cent to 60,115.13 — their highest level since Aug.18.

India’s retail inflation data, due later in the day after market close, is expected to snap a three-month downward trend in August as food prices surged, a Reuters poll of economists showed, likely raising the possibility of an aggressive rate hike by the Reserve Bank of India.

“Investors are going to closely watch domestic and US inflation data this week for any signs if they have moderated or peaked,” said Neeraj Dewan, director at Quantum Securities.

Markets are pricing in a straight 75 basis-point rate hike by the US Federal Reserve, not back-to-back increases and that indication will be provided by the inflation data, Dewan added.

The Nifty’s IT index closed 1.42 per cent higher, its fourth consecutive session of gain, while the Metal index advanced 0.92 per cent. Infosys Ltd and Tata Steel were among the top performers on the benchmark Nifty 50, climbing 1.6 per cent and 1.9 per cent, respectively.

Heavyweight Reliance Industries also provided a boost with a 1.1 per cent rise at close, after hitting a near two-week high in the session. The conglomerate late on Friday said its unit would buy polyester business of Shubhalakshmi Polyesters and Shubhlaxmi Polytex for Rs15.92 billion ($200.20 million).