NEW DELHI (Sept 12): India’s August inflation rate accelerated to the fastest since March, exceeding expectations ahead of the central bank’s policy review in October.

Key Points

Big Picture

The second consecutive month of price surge is closer to the upper limit of the  Reserve Bank of India’s inflation expectation at between 2% and 3.5% till September this year. Food prices may surge in the coming months after floods devastated farms in central and eastern India. Rising inflation could add to the pressure on central bank Governor Urjit Patel ahead of a policy review next month. It comes as India struggles with slack at factories and slow private investments worsened supply chain disruptions after a cash ban last November and chaos from a nationwide goods and service tax.

Economist Takeaway

"The August numbers signify a supply shock caused not just by floods-related disruptions but also because of an inherent slowdown as indicated by July factory numbers," said Rupa Rege Nitsure, chief economist at L&T Finance Holdings Ltd. "This isn’t a signal to RBI to raise rates. Instead it’s a clear signal that the slowdown has become more acute."

The fiscal outlook is also a growing cause for concern, said  Shilan Shah, India economist at Capital Economics, Singapore, forecasting a widening fiscal deficit in the coming years. "In particular, the loan waivers for farmers announced by various state governments in recent months, most recently in Karnataka and Punjab, are likely to put their fiscal positions under more pressure."

The Details