Instant View: India’s December retail inflation accelerates to 7.35% year-on-year

BENGALURU/MUMBAI (Reuters) – India’s retail inflation accelerated to 7.35% in December due to high food prices, government data showed on Monday.

December inflation was higher than 6.20% forecast in a Reuters poll of analysts.

COMMENTARY

ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI

“This number is sharply higher than our forecast. We expect inflation to continue to inch up in the coming months due to higher food prices. Also, the base is unfavourable in January 2020 as CPI had fallen to below 2% in January 2019. Hence, both base effect and price momentum are likely to keep prices elevated in the near future.”

“I think the MPC will be very cautious at the next policy (meeting). While just one print may not be enough to change rates or stance, we expect intense debate on the inflation issue at the upcoming monetary policy.”

ADITI NAYAR, PRINCIPAL ECONOMIST, ICRA LTD, GURUGRAM

“CPI inflation in December 2019 overshot both our projection of 6.7% as well as the upper threshold of the MPC’s band of 2%-6% by a substantial margin, driven by the double-digit surge in the food inflation.”

“The increase in the core CPI inflation was more modest than what we had feared in light of the revision in telecom tariffs. Nevertheless, the revision in rail fares, uptick in prices of some categories of automobiles, as well as an unfavourable base effect, may contribute to a further uptick in the core inflation to around 4.0% in the ongoing month.”

MADAN SABNAVIS, CHIEF ECONOMIST, CARE RATINGS MUMBAI

“CPI inflation at 7.4% is probably the highest in over five-and-a-half years, which was last recorded in July 2014. This is well above our forecast of 5.8%.”

“This has been led by food inflation of 14.1% with one single component, vegetables, rising by 60.5%.”

“Vegetable prices and inflation should come down in January with the new onion crop in and prices moving down. However, low base effect will impact inflation for one more month.”

RADHIKA RAO, ECONOMIST, DBS BANK, SINGAPORE

“December headline inflation witnessed a significant jump, to a five year high, along with an uptick in core inflation (3.7%). Base effects added to the buoyancy, which was also driven by higher food prices – vegetables and proteins.”

“Spurt in January’s number could be sharper given adverse base effects in the comparable period last year.”

“Pipeline pressures exist from upcoming increase in telecom prices, medicine costs and adjustments in cement/steel, keeping the headline in the 6% handle in the March quarter and above target for at least four-six months thereafter.”

JOSEPH THOMAS, HEAD OF RESEARCH, EMKAY WEALTH MANAGEMENT, MUMBAI

“CPI at 7.5% broke the ceiling going beyond the RBI tolerance limit of 6%, fully reflecting the recent uptrend in food prices. While fruit and vegetable prices may come down as these crops have short cultivation cycles, the rise in prices of pulses may stay on for more time.”

“While RBI may not hike policy rates in the immediate future, it may not be able to cut the rates either. While the circumstances around likely fiscal slippages may have an adverse impact on interest rates, the inflation level would add to these worries in the immediate term.”

MADHAVI ARORA, LEAD ECONOMIST, FX AND RATES, EDELWEISS SECURITIES, MUMBAI

“CPI inflation surged 7.35% in December, sharply overshooting the RBI’s 2%-6% policy target for the first time since mid-2016. Overall, this would constrain the RBI’s hand in conventional easing even as the output gap remains negative.”

“We think monetary accommodation still has further steam of another 50 bps in this rate cut cycle, albeit the timing of same is a tad tricky.”

“The upcoming budget in February would be closely watched for fiscal stance which could impact RBI’s reaction function. Even so, our estimates suggest inflation will likely remain above 6.5% in 4QFY20 and could constrain a rate cut in February.”

A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI

“I don’t expect a change in policy in February, but beyond that we still retain our view of a residual 15-25 basis points rate cut. However, April might be too soon for a rate cut due to headline inflation overshooting RBI’s estimates by more than 200 bps.”

“Further beyond April, growth recovery may also take a firm footing, so there is a good likelihood that the rate cut cycle is over even if inflation subsides to around 4.5% by H2FY21.”

“Still the caveat to this view is that we need to monitor how quickly the vegetable price rise draws down. For tomorrow we could see bond yields rising by around 5 basis points, assuming there is no open market operation announced today.”

RUPA REGE-NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI

“A sequential jump of 181 bps in headline CPI inflation to 7.35% in December is worrisome, even though it’s primarily led by supply shocks. Core inflation too has gone up by 25 bps to 3.76%.”

“In hindsight, this vindicates RBI’s pause in the rate cutting cycle in December. I expect January print also to be uglier as statistical base will continue to stay unfavourable. Given the weakness in demand, RBI will continue to keep the stance at accommodative, as inflation is likely to cool from February onwards.”

“I don’t expect expansionary fiscal policy to contribute to inflation, given the intensity of slowdown. The current stagflationary phase is due to supply shocks in the food and fuel sectors and adverse base effect.”

SREEJITH BALASUBRAMANIAN, ECONOMIST, IDFC AMC, MUMBAI

“The headline CPI number of 7.35% y/y in December 2019 was slightly above our expectation in the vicinity of 7%, owing to higher inflation in food, transport and communication.”

“We believe the RBI could pause in its upcoming February meeting given supply side food inflation is likely to keep the January CPI print above its target, despite onion prices already having started to fall. Fiscal plans envisaged in the budget would also be looked at.”

SAKSHI GUPTA, SENIOR ECONOMIST, HDFC BANK, GURUGRAM

“The sharp jump in CPI has been driven by not just higher vegetable prices, but also some pickup in protein inflation. We expect inflation to remain above 6% in January and remain elevated between 5.5-6% over the next 1-2 months thereafter.”

“Higher food inflation, revisions in LPG price, increase in telecom tariffs, and an unfavourable base effect is likely to keep the pressure on inflation at least till March-end.”

“Given the spike in the inflation rate, we expect the RBI to remain on hold at its February meeting.”

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

“CPI at 7.35% is at a 5-year high led predominantly by food, fuel and miscellaneous. Given this number, over the next few months CPI is expected to firm up further. For the headline to converge to 4% over the next fiscal year, food inflation will need to reverse dramatically. We maintain our no rate cut until October-December quarter in 2020.”

UPASNA BHARDWAJ, SENIOR ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI

“We expect the headline inflation to sustain above the upper tolerance level over the next few months before gradually tapering, as fresh food supply begins to hit the market. Clearly the room for monetary easing in the first half of calendar 2020 remains minimal despite growth continuing to remain below potential.”

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

“At current trends CPI inflation would average above 6.5% from December to March.”

“This is significantly above our previous expectation since food inflation remains unchecked despite imports and availability of stocks.”

“In hindsight, the RBI has been ahead of the market by pausing in the previous meeting versus market consensus of 25 bp cut. However, current trends in inflation are significantly above even RBIs projection of 5.1 to 4.8% in H2 FY20.”

“Given that the inflation spike is mostly due to supply disruption and bank credit growth remains anaemic, the RBI is likely to retain its accommodative stance and leave repo rates unchanged.”

(Reporting by Nallur Sethuraman, Derek Francis, Chandini Monnappa, Chris Thomas and Nivedita Bhattacharjee, Swati Bhat, Abhirup Roy and Philip George; Compiled and edited by Shounak Dasgupta)