By ANAND AUGUSTASALA: India’s inflation rate has increased sharply in the past few months, and the central bank is warning of further increases.
According to data compiled by Bloomberg, the average CPI inflation rate in the country rose to 3.2% in December, from 3.1% in November.
The increase was driven by the hike in prices of basic foodstuffs and other goods.
“This is due to inflation driven by inflation driven demand for basic goods,” said Anand Agarwal, chief economist at ICICI Bank.
“Inflation has risen due to the rising price of food and other basic goods and the fact that many of the products that people have been purchasing are being priced at very low rates.”
“We are seeing the kind of rise that we have not seen since 2013.
It is not a good time to be in the consumer market,” he added.
Analysts expect the CPI rate to continue to rise as a result of a fall in inflation from 8.5% in January to 7.8% in the month of March.
India is likely to be among the top five countries with the highest inflation rates globally.
The country’s government, which has been trying to slow the rise in prices, has reduced the minimum wage to 1.25 times the average annual wage, and implemented a two-tier system that will limit the number of job openings for those earning under 5 lakh rupees ($200).
However, inflation remains stubbornly high and has now exceeded 7% for the first time since August, according to a Reuters poll conducted in November and December.
Despite the recent increase in inflation, the RBI has maintained the benchmark rate unchanged at 6.25%.
“While the RBI expects inflation to fall further in the near term, it is not likely to move below the Reserve Bank of India’s (RBI) target of 5% over the medium term,” said Agarwals data.
While the rise of the CPI is an important part of India – the world’s second-biggest economy – the RBI is likely not to intervene until inflation has stabilized.
India’s Central Bank has also cut interest rates for the second time in less than a month, signalling it is ready to use monetary policy to tackle inflation.
Agarwal believes the central banks willingness to cut rates will have a positive impact on the Indian economy.
“I think the RBI will do the right thing, but we will wait and see how it plays out,” he said.
Indian stocks are on the rally, with the Sensex gaining 30% in after-hours trading, while the BSE Sensex rose 15%.
The rupee is on a downtrend against the dollar, with its recent decline being offset by gains against the British pound and the euro.