Inflation spike set to pile more misery on Indian bond investors
By Anirban Nag
Indias retail inflation accelerated more than estimated, giving ammunition to hawks in the central banks rate-setting panel for tightening policy and potentially adding to the woes of bond investors.
Consumer prices rose 4.6 percent in April from a year earlier, the statistics ministry said in a statement in New Delhi on Monday. Thats faster than the 4.4 percent Bloomberg consensus.
Mondays data — the final price print before the Reserve Bank of Indias policy review on June 6 — adds to concerns that crude oil prices holding at current levels will fan inflation in Asias third-largest economy. The Reserve Bank of India expects oil prices averaging around $78 a barrel to stoke inflation by 30 basis points.
Brent crude averaged $71.76 a barrel in April, according to data compiled by Bloomberg. It touched a high of $78 this month.
Paying more for oil, the nations biggest import, will widen Indias current account deficit and make the economy more vulnerable to rising U.S. interest rates. Bonds are poised to decline for the ninth month out of 10 amid concerns this might push the consumer-price inflation targeting central bank to raise interest rates sooner than later.
“Todays inflation number is very ugly. Its way above expectations,” Rupa Rege Nitsure, chief economist at L&T Finance Holdings Ltd. in Mumbai, adding that fuel prices are a worry. “RBI has a rule-based framework so most likely they will raise rates.”
The onshore swap markets are pricing in at least 50 basis points of rate hikes over the next year. Those expectations got a boost after central bank deputy governor in charge of monetary policy, Viral Acharya, said he would vote for a withdrawal in monetary accommodation in June, citing sticky core inflation.
Indeed, core inflation, which strips out volatile food and fuel components, has been hovering over 5 percent, making the central bank uneasy about price pressures. That hardening in stance on inflation led to a selloff in bonds in April. The yield on the 10-year sovereign note rose 10 basis points on Monday to 7.83 percent, the highest close for benchmark debt since February 2016.
Foreigners have been pulling out of the bond market given a rise in U.S. yields, and along with a slowdown in investments in stocks, they have contributed to weakness in the rupee — Asias worst performer this year. That, in turn, is stoking inflationary expectations, especially imported inflation.
“If India ceases to attract substantial investment in equities and securities, we could be looking at a shortfall of $19 billion this year,” said Hugo Erken, a senior economist at Rabobank International. “All these developments do not bode well for inflation.”
Rabobank expects inflation to pick up to 6.2 percent later this year.
In a further sign that pipeline pressures were building, wholesale prices also rose more than expected in April and theres little respite in store. Indias state-run refiners resumed raising retail gasoline and diesel prices after a three-week break that coincided with the run-up to elections in a southern state.
Key points from CPI and WPI data
Consumer food price index rose 2.8 percent Clothing and footwear rose 5.1 percent Fuel and lighting rose 5.24 percent Housing rose 8.5 percent Wholesale prices rose 3.18 percent in April, faster than the 2.9 percent estimate
HSBC Holdings Plc said in a note on Monday that rising oil prices would fan inflationary pressures in India. The bank changed its earlier call on the RBI and now expects two rate hikes this year, instead of a hold.
“From a domestic perspective, tightening may not necessarily be warranted, but the external turn raises pressure,” economists at the bank said.