India inflation rises to 7.8% in September

INDIA'S inflation accelerated to 7.8 per cent in September after the government hiked subsidised fuel prices to rein in the budget deficit.

The number released on Monday is worse than expected and gives the central bank little room to cut its key interest rate to counter slowing economic growth when it meets later this month.

Economists polled by CNBC-TV18 forecast inflation of 7.7 per cent in September.

Core inflation, which excludes volatile food and fuel prices, remained unchanged from August at 5.6 per cent.

"Core inflation has remained sticky," said Sonal Varma, economist at Nomura Financial Advisory and Securities in Mumbai.

"We were expecting some marginal drop."

She said headline inflation is likely to continue to rise as second round effects of higher fuel costs show up in, for example, rising food prices, reflecting increased transportation costs.

Fuel prices rose 4.0 per cent, driven by an 8.6 per cent rise in diesel costs.

The Reserve Bank of India has made clear that inflation remains its top concern, despite the tepid growth of Asia's third-largest economy.

The central bank has also pushed New Delhi to take credible steps to bring the fiscal deficit under control and enact reforms to unblock supply bottlenecks in the economy and bring prices down.

New Delhi has finally responded, raising diesel rates and opening sectors like retail to greater foreign ownership, which could bring crucial investment to India's inadequate supply chains, particularly for food.

"On one hand we do have the government's political response coming in, but inflation is not giving them the window to respond to the space the government is trying to create," Varma said.

"Our view is RBI will wait for inflation to moderate."

C Rangarajan, the chairman of the Prime Minister's Economic Advisory Council, told CNBC-TV18 the rise was "largely attributable" to the increase in the fuel price.

"This increase in fuel prices was planned," he said.

"It's still in the grey zone, because the Reserve Bank probably would be looking for some sign of a decline in inflation in order to be able to move ahead," he said.

The government revised July inflation up to 7.5 per cent, from its earlier estimate of 6.9 per cent.

Inflation was 7.6 per cent in August.

September's inflation is the highest for India since last November, according to financial information provider FactSet.

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