By Anirban Nag
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 per cent 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 per cent.
BloombergThe 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 per cent 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 per cent
Food and beverages prices gained 11.8 per cent
Fuel and lighting prices rose 3.7 per cent
Housing prices gained 4.2 per cent
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.
The Monetary Policy Committee last week kept the benchmark interest rate unchanged at a decade low of 5.15 per cent, 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 per cent. Beyond that, inflation is likely to ease back within the 2 per cent-6 per cent target range, which should open up room for a rate cut in June.”
— Abhishek Gupta, India economist
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 per cent and further to 5 per cent-5.4 per cent in the first half of the financial year beginning April 1. The RBI has a mandate to keep inflation in a range of 2 per cent-6 per cent. Economists surveyed by Bloomberg see inflation at 6.3 per cent in the January-March period and 5.3 per cent 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 per cent 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 per cent until September,” John said.
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