New Delhi: India’s retail inflation soared to 7.35 per cent in December on account of a sharp increase in vegetable prices, increasing the likelihood of the Reserve Bank of India holding on to key policy rates in the monetary policy review due next month.
Inflation based on the consumer price index rose sharply for the fifth consecutive month, breaching the upper level of the RBI’s inflation targeting mandate. The inflation targeting mandate as per the law is 4 per cent with a +/-2 per cent band.
Such high levels were last seen in August 2014, much before the enactment of the inflation targeting framework in June 2016.
Inflation was at 5.5 per cent in November.
The high inflation level comes at a time the Indian economy is expected to slow down to a 11-year low of 5 per cent in 2019-20, led by a slowdown in private consumption and investment, raising fears of stagflation or a situation where the rise in prices is accompanied by stagnant demand.
Data released by the ministry of statistics and programme implementation showed that consumer food price inflation rose to 14.1 per cent, led by a 60.5 per cent increase in vegetable prices and a 15 per cent increase in the prices of pulses. While vegetable price inflation may be transitory, prices of pulses are likely to remain elevated in the coming months.
Economists pointed out that these numbers may prolong the pause in rate cuts by RBI. In a surprise move, the monetary policy committee had opted for a status quo in key policy rates at its previous meeting in December. The next meeting of the MPC on 6 February, scheduled after the presentation of the union budget on 1 February, is expected to take a similar stance given that a likely fiscal slippage is going to add to inflationary pressures.
Joseph Thomas, Head of Research at Emkay Wealth Management, pointed out that RBI may not be able to cut rates in the near future.
“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 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,” he said.
Devendra Pant, Chief economist at India Ratings and Research, said that inflation, particularly pulses and coarse cereals, has been in double digits since the beginning of 2019. He said that there is an element of seasonality involved in the current retail inflation but pointed out that the job of the RBI has become more complicated due to a growth slowdown and the fact that retail inflation is now higher than the targeted level. “Irrespective of the fiscal stance taken by the government in the budget”, a rate cut is unlikely in the February policy.