Markets weaken as inflation rises to 7-month high of 6.46%

India’s wholesale price inflation rose to 6.6 percent against expectations of 6 percentas prices of manufacturing goods continued to climb despite a relief rally in the battered rupee.

The headline inflation has risen to to 6.46% in September as compared to 6.1% in August & 5.85% in July.

The biggest driver of inflation is still food inflation, which accelerated to a three-year high of 18.40 percent in September from 18.8 percent in August because of supply disruptions due to heavy monsoon and poor storage facilities.

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The elevated price levels will add more pressure on the Reserve Bank of India - which has clearly signalled that it will target inflation - to raise interest rates even as the economy is growing at its weakest pace in a decade.

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“The bottom line is that with the new governor it’s very clear he will not unnecessarily over-react to just one month’s print.I think the RBI is forward looking and they are looking at the medium-term inflation trajectory as it’s likely to pan out instead of getting excessively influenced by this one print.Having said that, there was a case for a repo rate hike, which the governor had sort of pointed to, in the next policy. And, I think this data sort of strengthens the case for keeping things a little tight as far as monetary policy is concerned, said Abheek Barua, chief economist at HDFC Bank.

Last month, RBI governor Raghuram Rajan surprised markets with a 25 basis points hike and clearly signalled that the central bank’s focus would be bringing down inflation.

A weak rupee is another reason why analysts forecast inflation would remain stubbornly high, adding to the central bank’s woes.

Although the rupee gained 5 percent last month, it is not expected to recover much more ground in the near term and remain weak, according to a separate Reuters poll, making the cost of crude oil imports more expensive.

Meanwhile, Bonds slumped, while the rupee weakened after wholesale price inflation (WPI) came in above analysts’ estimates, raising expectations that the central bank will raise interest rates for a second consecutive month in late October.

With inputs from Reuters