India’s Dec retail inflation eases, stays within RBI’s tolerance level

(Reuters) – India’s annual retail inflation in December edged down from the previous month and remained within the central bank’s comfort zone as the rate of food price rises continued its downward trend, government data showed on Thursday.

Annual retail inflation rose 5.72% in December from 5.88% in the previous month. Analysts, in a Reuters poll, had predicted a December reading of 5.90%.

The latest inflation print was below the Reserve Bank of India’s (RBI) upper tolerance level of the 2%-6% range for the second consecutive month.

COMMENTARY

ADITI NAYAR, CHIEF ECONOMIST, ICRA, GURGAON

“We expect the core inflation to remain elevated in Q4 FY23, given the continued pass-through of higher input costs by producers and sustained robust demand for services. We caution that the CPI inflation for January 2023 may print at ~5.8-6.0%, slightly higher than the levels seen in December, given the stickiness in core inflation and an unsupportive base for food inflation.

“While the average CPI inflation in Q3 FY23 (6.1%) has come in significantly below the (RBI’s monetary policy committee) MPC’s projection of 6.6%, we foresee a flattish print in Q4, before a considerable correction sets in during Q1 FY24.”

MADHAVI ARORA, LEAD ECONOMIST, EMKAY GLOBAL FINANCIAL SERVICES, MUMBAI

“Food inflation should provide further relief ahead, with a healthy winter harvest so far. While some components of food (cereals, milk and spices etc.) may remain on the higher side, food inflation may remain sub-6% in the coming months. While China’s reopening could be an upside risk to global commodities, other near-term pressures could arise from imported inflation through uncertain FX and from sticky services inflation.

“With domestic demand being fairly resilient, core CPI pressure may remain reasonably sticky sequentially in the near term. That said, lower imported inflation, slower demand amid monetary transmission and base effects should directionally still imply lower inflation in FY24.”

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

“The headline CPI inflation has been undershooting the RBI’s and Street’s expectations on account of a faster-than-expected fall in domestic and global food prices and a moderation in fuel prices. Going by the current trends in demand, especially from the rate-sensitive sectors, I expect the MPC to take a pause in February and focus more on growth moderation.”

RADHIKA RAO, SENIOR ECONOMIST, DBS BANK, SINGAPORE

“CPI inflation at 5.7% yoy is in line with our forecast. Besides base effects, food and fuel were off the boil, with vegetables, edible oils and pulses easing, while cereals held their ground. Besides better arrivals of kharif crops, rabi sowing is also faring well this season, after weak dispersion of rainfall disrupted summer foodgrain output.

“Globally, the pullback in commodity prices is slowing pressure on incremental build-up in costs. Core inflation is sticky at around 6.1%. While the MPC was non-committal on the path ahead at the December rate review, we expect the decision to be data-dependent. With moderating inflation prints and high-frequency data likely to increasingly turn mixed, the remaining 25 bps hike could be delivered at the February meeting before rates settle into a prolonged pause.”

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

“December CPI at 5.7% moderated by less than our expectation of 5.5%. The softening in inflation was expectedly driven by food on improved domestic supply. Meanwhile, there was a slight uptick in education, medical, fuel and personal care inflation during the month.

“Steady moderation in CPI should give the MPC room to pause after a final 25 bps rate hike in February. The strength of domestic demand, credit demand and outlook for macro-imbalances like fiscal deficit and current account deficit (CAD) will determine future action/inaction from MPC.”

SREEJITH BALASUBRAMANIAN, ECONOMIST, IDFC AMC, MUMBAI

“India’s December CPI of 5.7% y/y continued to be primarily driven by the recent drop in vegetable prices. Within food, the price growth of pulses and edible oils has remained soft but that of cereals, particularly wheat, has been rising. Recent reports of the Food Corporation of India planning to offload some of its wheat stock should help here.

“However, core inflation remains sticky and elevated (6.1% in December and on average over the last two years) and the RBI’s MPC highlighted this at its latest meeting. While softer seasonal food prices (mainly vegetables) and the fall in commodity prices help, as global growth slows, core services inflation could be stickier as pent-up demand plays out and firms pass on input costs. The fact that India currently does not have a strong (rural) wage growth cycle should dampen any second-round price effects.”

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

“The sharper-than-expected drop in headline inflation, despite the base effect turning adverse, would come as a relief to the RBI. This was mainly on account of easing food prices, especially the sharp drop recorded by vegetable prices as seasonality held sway.

“However, like in November, the sharp increase in prices of cereals and spices prevented an even further decline. Worryingly for the RBI, core inflation continues to remain elevated. Yet we do not see the possibility of a wage-price spiral given a weak labour market. We, therefore, retain our expectation of one final rate hike of 25 bps during the February meeting, taking the terminal policy rate to 6.5%.”

SAKSHI GUPTA, PRINCIPAL ECONOMIST, HDFC BANK, NEW DELHI

“This inflation print should nudge the RBI to reduce the quantum of its rate hike in February to 25 bps. Going forward, inflation is expected to average 6.5% in FY23 and 5.2% in FY24.

“That said, for the next fiscal, there are emerging risks to the inflation outlook next year, particularly in regards to any rise in commodity prices due to the China reopening underway and the continued stickiness in core inflation. As a result, the RBI is likely to remain watchful and we do not see the possibility of a turn in the interest rate cycle (rate cuts) in FY24.”

UPASNA BHARDWAJ, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI

“December CPI headline came in softer than expectations, largely led by lower food prices. However, core inflation continues to remain elevated and sticky. Overall, as the focus remains on the headline, which is clearly softening along with the benign global environment, the MPC will get a breather to further moderate the pace of monetary tightening. We expect the one final 25 bps rate hike in February followed by a prolonged pause.”

GARIMA KAPOOR, ECONOMIST, INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI

“Supported by a deflationary trend in food prices, CPI inflation came within the RBI’s mandate of 6% for the second consecutive time even as core pressures remained sticky and elevated.

“We see another sub 6% CPI print in January 2023. While cooling off of headline inflation will provide comfort to the MPC, sticky and elevated core price pressures will compel the MPC to hike rates by another 25 bps in Feb 2023 policy.”

(Reporting by Rama Venkat, Bharath Rajeswaran, Ashish Chandra and Nallur Sethuraman in Bengaluru; Editing by Savio D’Souza)

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