Wholesale price inflation for October accelerated to an eight-month high of 7 per cent on the back of a rise in fuel and manufactured goods prices. The higher-than-expected pace of price rise has raised the prospect of a fresh rate hike in mid-December.
The Reserve Bank of India has already hiked the key repo rate by 25 basis points (0.25 per cent) twice since Dr Rajan took over as the governor in September. Another hike would mean further hike in EMIs for existing home loans and higher interest rates for new loans.
Reserve Bank Governor Raghuram Rajan had on Wednesday said that he was comforted by falling core consumer inflation despite "worryingly high" food prices. However, the WPI reading showed a rise in core inflation (manufacturing products inflation), which will be worrying for the central bank, analysts said.
"Core consumer price index has declined, but core WPI has gone up. The chances of another monetary tightening cannot be ruled out," Devender Pant of India Ratings told NDTV.
Equity markets pared gains in afternoon trade after holding up for some time. The BSE Sensex was up 225 points as of 2.10 p.m., but it traded 150 points off the day's high. The rupee traded at 63.19 after earlier hitting a high of 62.96.
"Looking at today's number and considering the higher revised August readings, the chances of immediate rate adjustments from RBI's end in the next policy meet can't be ruled out completely," said Shakti Satapathy, fixed income strategist at AK Capital in Mumbai.
Concerns remain that India is mired in a stagflationary environment of rising inflation but slowing growth, as most analysts say the economy is expanding even more slowly than the decade low of 5 per cent in the fiscal year ended in March.
At the heart of India's inflationary pressures is a spike in food prices. Retail prices of onions have quadrupled in some cities over the past three months, serving as a powerful reminder of the impact on consumers.
Thursday's data showed WPI food inflation rose 18.19 per cent compared with 18.4 per cent in September. Rising food prices had also been reflected by data on Tuesday showing consumer price inflation accelerated more than expected in October, to 10.09 per cent from September's annual pace of 9.84 per cent.
Still, Dr Rajan sought to address concerns about inflation at Wednesday's news briefing, and analysts have interpreted the remarks as signalling reluctance to raise India's key lending rate - the repo rate - which currently stands at 7.75 per cent.
Before Dr Rajan's remarks on Wednesday, the rupee slumped to a two-month low over fears about the impact of an early end to Federal Reserve stimulus.
On Thursday, the rupee strengthened on comforting remarks by Dr Rajan and by Fed chair-nominee Janet Yellen.
Analysts said that lingering worries about the end of Fed stimulus could also prevent the RBI from raising interest rates as that would further undermine growth prospects.
(With inputs from Reuters)
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