DNA Money Edit: Increasing retail inflation dims rate-cut hopes

As retail inflation picked up in October, led largely by higher vegetable and fuel prices, and hit a seven-month high of 3.58%, hopes of an interest rate-cut have dimmed. Higher inflation was driven by vegetable prices, which rose 7.5% over last year. Going forward, higher crude oil prices are likely to spike up inflation for the remaining part of this fiscal. A 10% rise in crude oil prices could increase the consumer price index (CPI) inflation by around 25 basis points if the government chooses to pass on the full hike to consumers.

Apart from higher food prices, the increase in HRAs and lingering inflationary effects of goods and services tax (prior to the Council slashing tax rates on certain items last week) have also helped drive up inflation. Price pressures are likely to strengthen due to an unseasonal rise in vegetable prices, higher oil prices and a gradual cyclical recovery. Analysts believe that the CPI inflation could rise above 4% in November and stay above the Reserve Bank of India's target of 4% through 2018.

That takes away the possibility of any rate cut by the central bank in the near future. As Morgan Stanley said in a recent note, there is not enough comfort for it to cut rates in December. Apart from the likely spurt in oil prices, the green shoots showing an uptick in the economy growth will also go against further monetary easing.