India’s latest monthly inflation and industrial production numbers are out and they’re not good. India’s headline inflation rate accelerated to an eight-year peak of nearly 8 per cent last month, driven by food and fuel price rises, government figures showed late on Thursday. The data piles more pressure on the central bank to turn more hawkish.

“Given that it (inflation) is likely to rise even higher over the coming months, further hikes to the (Reserve Bank of India’s leading) repo rate looked nailed on. We think the repo rate will rise to 5.65 per cent by the end of the year,” said Shilan Shah, senior India economist at Capital Economics.

Separate data showed that the country’s industrial production grew a tepid 1.9 per cent year-on-year in March, pulled down by a strong base effect and price rises. The manufacturing sector output grew by a scant 0.9 per cent in March. Industrial production bounced back to grow by 11.3 per cent last year after shrinking 8.4 per cent the previous year when the pandemic began.

The Consumer Price Index climbed to 7.79 per cent in April, up from 6.95 per cent in March. The April number exceeded analysts’ forecasts that inflation would be around 7.75 per cent. Last month’s inflation reading was the highest since May 2014 when inflation stood at 8.33 per cent. April’s figure marks the fourth straight month that inflation has been above the central bank’s 6.0 per cent ceiling.

Overall food inflation stood at 8.38 per cent, up from 7.68 per cent in March, as the cost of grains, meat, edible oils, vegetables and milk among other products rise. The invasion by Russia of Ukraine, two countries which accounted for nearly 30 per cent of the global wheat trade, is pushing global grain prices higher. Cooking oil prices have also risen on the back of supply disruption from Ukraine as well as Indonesia’s ban of palm oil exports.

Rupee slides
Also on Thursday, the rupee slid to another life-time low against a surging dollar while stocks tumbled, rattled by worries that inflation will push the Reserve Bank to increase rates more aggressively and slow the economy. The 30-share Sensex tanked 1,158.08 points to end at 52,930.31, while the Nifty fell 359.10 points to 15,808.

“The rate hike cycle may begin as early as June, if the next inflation print doesn't significantly cool off from the March level," said ICRA economist Aditi Nayar. Analysts expect the bank to hike its leading interest rate known as the repurchase rate or repo by around 50-70 basis points by September, on top of a surprise 40-basis point increase earlier this month to 4.40 per cent. It was the bank’s first rate rise in nearly four years.

Research firm Nomura has lumped India in with three other Asian economies – Singapore, South Korea and Taiwan where it says inflation is “hot.” Nomura expects the central bank to raise the repo rate to 6.25 per cent by the second quarter of 2023 in an attempt to check inflation.

Foreign holidays dearer
While a weakening rupee makes exports more expensive, we’re an import-oriented economy with a trade deficit that widened to $20 billion last month from $15.29 billion in April 2021. All imports from food, electronic goods like mobiles to fuel become more expensive as do foreign holidays with a softer currency The rupee has lost 0.8 per cent against the dollar so far this week.

The central bank had been keeping its interest rates at record lows in an effort to jumpstart the pandemic-hit economy but now says it’s also focusing on “lowering inflation and anchoring inflation expectations.”

Higher inflation in the US and around the world is also worrying investors who are fearful that monetary tightening by the US Federal Reserve and other central banks will create a global economic slowdown.

The rupee tumbled as much as 0.5 percent to 77.63 to the dollar before steadying on reported intervention by the central bank which sold dollars and bought rupees. The rupee ended the day at 77.42 against the dollar, below the previous day’s close of 77.23. It was the second time in a week the rupee set a new record low. Analysts believe that the currency could test the level of Rs 80 to the dollar in coming months.

RBI with comfortable reserves
The Reserve Bank wants to avoid any “jerky” movements of over half a rupee against the dollar but hasn’t targeted a particular level where it wants the currency to settle. The bank is sitting on still comfortable reserves of some $597 billion that it can use to prop up the rupee and reduce volatility in its movements.
Normally, no central bank deploys its reserves to fight against the underlying market trend. But the central bank is expected to seek to keep the currency from falling below Rs 78 to the dollar. Still, “given that the RBI has ample forex reserves, we expect the rupee to remain more stable and weaken less than most other EM currencies against the greenback over the next couple of years,” said Adam Hoyes, an economist at Capital Economics.

Morgan Stanley pared its growth forecasts for the country’s economic growth to 7.6 per cent for the current fiscal year and 6.7 per cent for the following year. That forecast is some 30 basis points lower than the bank’s previous estimates. Private brokerages have been steadily reducing their growth estimates for India amid surging oil prices and reduced domestic demand.

Ukraine war a key factor
Morgan Stanley said that the effects of the Russia-Ukraine war was a key factor in lowering its growth forecast for India. The effects of the war will likely be “higher inflation, weaker consumer demand, tighter financial conditions, the adverse impact on business sentiment, and a delay in capex recovery," said Upasana Chachra, India chief economist for Morgan Stanley.

Figures for India’s wholesale price inflation which feeds through to the CPI will be released later this month. In March, the WPI spiked to 14.55 per cent. The big worry for policymakers is that the CPI which measures inflation at the retail level will move toward the Wholesale Price Index level.