Mumbai: India’s inflation may have peaked in January and will probably ease in coming months, allowing the central bank room to resume interest-rate reductions.
Data Wednesday showed retail inflation surged to 7.6% last month from a year earlier, mainly on account of costlier fuel and elevated food prices. That’s the highest level since May 2014 when inflation was at 8.3%.
The good news is food prices, especially those of vegetables, are coming off the boil, which analysts predict will set the course for deceleration in price-growth. Inflation will ease to below 6% by March, according to Rahul Bajoria, senior economist at Barclays Bank Plc in Mumbai.
“While onion prices are already falling materially on the back of greater supply, we expect the January print to mark the peak in CPI,” Bajoria said. “Vegetable prices will likely drive this drop, along with some expected declines in petroleum prices.
Key Points From CPI Data:
Consumer food price index rose 13.6%
Food and beverages prices gained 11.8%
Fuel and lighting prices rose 3.7%
Housing prices gained 4.2%
Slowing consumer-price gains will allow the Reserve Bank of India to keep the door open for more policy easing to boost credit demand in an economy that’s on course for its weakest expansion in 11 years. After delivering 135 basis points of cuts in five moves last year, the central bank cited high inflation for pausing in December.
With the bulk of those reductions yet to be passed on by banks to their customers, the RBI turned to unconventional policy tools to keep borrowing costs down.
We are deeply grateful to our readers & viewers for their time, trust and subscriptions.
Quality journalism is expensive and needs readers to pay for it. Your support will define our work and ThePrint’s future.
The Monetary Policy Committee last week kept the benchmark interest rate unchanged at a decade low of 5.15%, with Governor Shaktikanta Das saying there was policy space available for future action.
What Bloomberg’s Economists Say:
“We expect the RBI to maintain its accommodative hold at its next review, in April, and leave it’s benchmark rate at 5.15%. Beyond that, inflation is likely to ease back within the 2%-6% target range, which should open up room for a rate cut in June.”
— Abhishek Gupta, India economist
For the full report, click here
Interest rate swaps are pricing in the chance of a rate cut in the next 12 months, while economists expect 25 basis points of rate cuts this year.
The view is supported by the central bank’s forecast that inflation will ease in January-March to 6.5% and further to 5%-5.4% in the first half of the financial year beginning April 1. The RBI has a mandate to keep inflation in a range of 2%-6%. Economists surveyed by Bloomberg see inflation at 6.3% in the January-March period and 5.3% the following quarter.
Underlying inflation, which strips out volatile food and petroleum products, is expected to remain muted. While it inched up to 4.2% in January, economists say that was mostly on account of higher telecommunication tariffs amid overall demand remaining subdued.
“Fundamental drivers of inflation are weak,” Indranil Sen Gupta, chief economist at Bank of America Merrill Lynch said, citing reasons such as sub-potential growth, tighter liquidity, good winter sowing of crops and limited fiscal slippage.
Recent surveys from the central bank showed consumer sentiment has worsened to a near five-year low while slack in manufacturing companies widened to its most on record. The findings temper any optimism from recent high-frequency indicators such as purchasing managers’ surveys that showed a pick-up in both services and manufacturing sectors.
What’s uncertain is the timing of any cut. Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai, is penciling in a 25 basis point easing but not before December.
“We do not see inflation falling significantly below 6% until September,” John said.-Bloomberg
News media is in a crisis & only you can fix it
You are reading this because you value good, intelligent and objective journalism. We thank you for your time and your trust.
You also know that the news media is facing an unprecedented crisis. It is likely that you are also hearing of the brutal layoffs and pay-cuts hitting the industry. There are many reasons why the media’s economics is broken. But a big one is that good people are not yet paying enough for good journalism.
We have a newsroom filled with talented young reporters. We also have the country’s most robust editing and fact-checking team, finest news photographers and video professionals. We are building India’s most ambitious and energetic news platform. And we aren’t even three yet.
At ThePrint, we invest in quality journalists. We pay them fairly and on time even in this difficult period. As you may have noticed, we do not flinch from spending whatever it takes to make sure our reporters reach where the story is. Our stellar coronavirus coverage is a good example. You can check some of it here.
This comes with a sizable cost. For us to continue bringing quality journalism, we need readers like you to pay for it. Because the advertising market is broken too.
If you think we deserve your support, do join us in this endeavour to strengthen fair, free, courageous, and questioning journalism, please click on the link below. Your support will define our journalism, and ThePrint’s future. It will take just a few seconds of your time.