India’s retail inflation surges, but rate cut hopes still high

India’s retail inflation rose close to the central bank’s medium-term target of 4% in September for the first time in 14 months, but analysts still predict a sharp economic slowdown will prompt a sixth consecutive interest rate cut in December.

Annual retail inflation rose to 3.99% last month, driven by higher food prices, up sharply compared with 3.21% in the previous month and higher than the 3.70% forecast in a Reuters poll of analysts.

Retail food prices, which make up nearly half of India’s inflation basket, increased 5.11% in September from a year earlier, compared with 2.99% in August.

Subdued inflation and an economic slowdown have allowed the Reserve Bank of India (RBI) to cut interest rates by a total of 135 basis points this year, including a 25-basis-point cut earlier this month, making it the most aggressive central bank in Asia.

The RBI said it expected inflation to stay below its medium-term target through to the early months of the 2020-21 fiscal year, while lowering its economic growth forecast to 6.1% for the current year ending March 2020, from an earlier estimate of 6.9%.

Economists said economic growth could fall as low as 5.8%, dragged down by a slump in consumer demand and investment, encouraging the RBI to cut rates for the sixth consecutive time at its next meeting in December.

Garima Kapoor, economist and vice-president at Elara Capital, said the arrival of the new crop in the market could ease food prices and so calm inflation, providing the RBI with the headroom to cut rates further.

“We expect the MPC (Monetary Policy Committee) to cut the policy repo rate by another 50 basis points until March-2020 with a 25 basis points cut in December,” she said, referring to the central bank’s benchmark interest rate.

Separately, figures released on Friday showed industrial output shrank 1.1% in August, the worst performance in nearly seven years.

Annual wholesale price-based inflation eased to 0.33% in September, from 1.08% in the previous month, while economists in a separate Reuters poll said the central bank was not yet done with rate cuts.

India’s unemployment rate was 7.16% in September, compared with 6.47% a year ago and 8.2% in the previous month, estimates from the Centre for Monitoring Indian Economy, a Mumbai-based think-tank, showed.

The next decision from the RBI’s monetary policy committee (MPC) is due on Dec. 5.

India’s passenger vehicle sales slumped 23.7% in September, the 11th straight month of declines, prompting an industry body to flag more job cuts if sales failed to pick up soon.

“All high frequency indicators of demand indicate soft demand conditions,” Kapoor said.

Separatley, Total has agreed to buy a 37.4 per cent stake in India’s Adani Gas, the two firms said Monday, with the French giant spending $600 million to expand its access to the energy-hungry country.

The Indian firm, part of the Adani Group conglomerate, is one of the four main distributors of city gas in the country, and plans to increase its coverage to six million homes and 1,500 outlets to supply vehicles over the next decade.

Under the terms of the deal, Total will make an open offer to Adani Gas shareholders to purchase up to 25.2 per cent before buying the remaining equity from the company, leaving the French and Indian firms with an equal share.

“Energy needs in India are immense and the Indian energy mix is key to the climate change challenge,” Patrick Pouyanne, Total chairman and chief executive, said in a statement.

“The natural gas market in India will have a strong growth and is an attractive outlet for the world’s second-largest LNG player that Total has become,” he added.

Natural gas currently represents a fraction of India’s energy consumption − around seven per cent − while a June report by the Centre for Science and Environment think-tank found that the country’s gas-based power plants were running at 24 per cent of their capacity.

On Sunday, Oil Minister Dharmendra Pradhan said New Delhi was investing over $60 billion to build pipelines and other infrastructure aimed at increasing the use of natural gas in the country, the Press Trust of India reported.

“Our government is exploring strategic partnerships for overall development of oil and gas sector. The role of private sector − both domestic and from abroad, for bringing in investments with necessary innovations for future energy landscape in the country, will remain crucial,” he said in Delhi.

India has set a target to increase natural gas consumption to 15 per cent by 2030.

“Total’s investment in Adani Gas reinforces India’s natural gas and demand potential. We look forward to working together towards delivering India’s vision for clean and green energy,” said Gautam Adani, founder of the mining-to-logistics conglomerate.

Agencies