File picture of a promotional event at a Mumbai mall. India’s inflation is now touching worrying levels for government and central bank. Image Credit: Bloomeberg

(Bloomberg): India’s consumer price inflation hit a more than five-year high, boosting the case for the central bank to keep interest rates on hold for longer and possibly putting at risk its accommodative stance.

Data showed inflation breached the upper end of the Reserve Bank of India’s 2-6 per cent target band as it accelerated to 7.35 per cent in December from a year earlier - the steepest gain since July 2014.

Any immediate respite seems remote, as volatile crude oil prices amid US-Iran tensions add to price pressures. In India, the world’s third-biggest oil importer, costs of everything from food to medicines and mobile-phone services have already been climbing.

Core inflation, which strips out volatile food and fuel prices, inched up to 3.75 per cent last month from 3.5 per cent in November.

The December price print is “unpalatably high,” said Aditi Nayar, an economist at ICRA Ltd.. Concerns surrounding a higher core inflation trajectory are likely to be adequate for policymakers to remain on hold in February, and consider a possible change in stance from accommodative to neutral, she said.

On hold

The RBI cited “much higher than expected” inflation when it unexpectedly kept interest rates unchanged in December following five cuts totaling 135 basis points earlier in the year. Price stability is the central bank’s prime objective as persistently high inflation disproportionately affects the poor, Governor Shaktikanta Das said last week.

That’s a more cautious tone than his comments in December, when he said the central bank will maintain an easing bias for “as long as it is necessary” to revive economic growth.

The central bank will make its next interest rate decision on February 6, days after Finance Minister Nirmala Sitharaman is scheduled to deliver a budget speech. With limited room for more central bank easing, all eyes are on the government to take steps to boost growth from 5 per cent this fiscal year.