Indian consumer price inflation likely to rise further

The uptick in Indian consumer price inflation in November doesn't put the RBI's inflation estimate for January 2016 under threat, equally it doesn't highlight that the central bank cannot be certain of meeting its more challenging medium-term targets. This bolsters the view that the window for further interest rate cuts has now closed.

Consumer price inflation accelerated to 5.4% y/y in November, from 5.0% y/y in October. This was marginally higher than the estimate of 5.3%. The pick-up in CPI inflation last month was in large part due to a rise in food inflation, which was the result of delays in the sowing of the rabi (winter) crop amid unusually warm temperatures for this time of year. Food inflation accelerated to 6.1% y/y in November, from 5.3% y/y in October.

Inflation remains lower below the RBI's 6.0% target for January 2016. But its attention has now turned towards meeting the medium-term inflation targets of 5.0% for March 2017, and 4±2% for March 2018. Meeting these will prove an altogether tougher challenge. As it is, inflation expectations have been rising over the past few months, in all likelihood on the back of the recent rise in food inflation. In addition, the RBI will now have to contend with a likely 23% pay rise for some civil servants from next year, in light of the Pay Commission's recommendations. Public sector pay increases on this scale may put upward pressure on wage settlements more generally, and feed into higher inflation.

"We think that the window for further easing following the cumulative 125bp of rate cuts this year has now shut. We will be looking at today's data in more detail in a forthcoming Data Response",says Capital Economics in a research note.