Expert Views: India's inflation accelerates to above RBI target

MUMBAI (Reuters) - India's annual consumer price inflation accelerated at a faster-than-expected pace to 6.07 percent in July, above the central bank's 2-6 percent target, according to government on Friday.

Separately, data showed India's industrial output rose a stronger-than-expected 2.1 percent in June from a year earlier.

COMMENTARY

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCE HOLDINGS, MUMBAI

"While a lot of contribution to high CPI is coming from food inflation, which is likely to ease from September onward, core CPI will have an upside bias, given that the government is going to distribute the benefits from 7th pay commission and the government is also committed to meet the GST deadline. That will also contribute to services inflation.

"I am not seeing any scope of rate action, but if food inflation really surprises on the positive side then there could be a last 25 bps rate cut towards end of December or early January. But transmission is not going to happen in a big way because bank balance sheets remain fractured."

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI

"I wouldn't see this as that much of a surprise. Going forward it is likely to moderate both because of the base effect operating favourably and food prices coming down. But there is always a lag between monsoon and food prices.

"With this crossing the (central bank's inflation target) band I think rate cut expectations will have to be damped down, and at best perhaps we'll have one towards the end of the year."

ABHISHEK UPADHYAY, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI

"Modest acceleration in headline inflation was anticipated on account of statistical factors.

"The details are less worrying. Inflation momentum when adjusted for seasonality has slowed for two consecutive months, and core inflation is stable. Also, food inflation is mainly driven by higher perishables prices that are volatile.

"Pulses prices are still continuing to grow in sequential terms, but should come down sharply over the latter part of the year.

"That could imply that RBI may still be able to achieve on the 5 percent inflation target for the close of the fiscal (year). That may open up some room for RBI to carry out residual easing, although scope for deeper easing is just not there."

SHILAN SHAH, INDIA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE

"The sharp rise in Indian consumer price inflation in July pushes it further above the Reserve Bank's 5.0 percent target for March 2017. Prospects for monetary policy depend in part on who is chosen to succeed Governor Raghuram Rajan at the RBI but, for now, we believe the easing cycle is over.

"Admittedly, forecasts for a strong monsoon this year had raised hopes of a boost to agricultural production and a subsequent drop in food inflation. Rainfall has been strong in recent weeks but this hasn't translated into lower food prices. This is because other factors, such as the government's crop supply management programme, have mitigated some of the impact.

"What's more, our view that the finance ministry will be forced to relax its fiscal deficit targets over the coming months has been reinforced by the government's decision to formally approve public pay increases totalling $13bn that were recommended by the Pay Commission last year. A looser fiscal stance could lead to a rise in inflation expectations.

"Of course, the outlook for monetary policy depends in part on who is appointed as the new governor of the RBI, with Mr. Rajan stepping down next month. The appointment of a dovish candidate would raise the chance of further policy loosening. But as things stand, we expect the repo rate to remain on hold at 6.50 percent for the rest of 2016 and 2017."

MADHAVI ARORA, ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI

"I think protein inflation continues to be the bone of contention as far as food inflation is concerned. But the other bone of contention which I found was that there was an increase even in the core component. The personal care component has surged substantially.

"We are continuing to see one more rate cut by the end of the year, considering the fact that inflation trajectory will slow down materially in the second half of the year as seasonal factors correct and base effect fades."

(Reporting by Neha Dasgupta and Abhirup Roy; Compiled by Rafael Nam)