Rising Food Prices Push Dec Retail Inflation To Over 5-Year High

India’s annual retail inflation accelerated to 7.35% in December, the highest in more than five years, strengthening views that the central government will once again hold its key policy rates unchanged at next month’s review.

The pick-up in inflation rate, mainly driven by rising food prices, adds to the challenges for Prime Minister Narendra Modi, who is trying to revive slowing economic growth amid student protests against a controversial new citizenship law that critics say is discriminatory against Muslims.

Finance Minister Nirmala Sitharaman will present the annual budget for 2020/21 on Feb. 1, and is widely expected to increase spending on infrastructure and cut taxes, which some economists fear could further fuel prices.

The Reserve Bank of India (RBI) will hold its next policy review from Feb. 4 to 6.

Annual retail inflation in December remained above the RBI’s medium-target of 4% for the third straight month, and also above the 5.54% posted in November and higher than the 6.20% forecast in a Reuters poll of economists.

Retail inflation had touched 7.39% in July 2014, according to Refinitiv data.

Retail food prices, which make up nearly half of India’s inflation basket, increased 14.12% in December from a year earlier, against 10.01% in November. Some vegetable prices, including prices of onions that are a staple in Indian cooking, have increased more than four-fold since June.

The RBI cut its policy repo rate by 135 basis points last year before holding in December, while warning against rising inflationary pressures. Meanwhile the government and central government have downwardly revised growth forecasts to an 11-year low of 5% for the current fiscal year ending in March.