CPI inflation at over 5-year high: RBI likely to be cautious before next rate cut; has a tough task ahead to balance growth, rising prices

  • The government has set a target for RBI to keep inflation between the 2 percent-6 percent range

  • In December, food inflation rose to 12.16 percent from 8.73 percent in the previous month

  • The RBI has cut policy rate by a total of 135 basis points in the current rate cut cycle

With retail inflation for December at 7.35 percent, the central bank will be in a cautious mode before considering further rate cuts in policy despite a slowing economy. The Reserve Bank of India (RBI) will have to carefully weigh its growth-inflation policy priorities since this is the first time since July 2016 that retail inflation is breaching the central bank’s target, economists said.

The government has set a target for RBI to keep inflation between the 2 percent-6 percent range. According to economists, there is a possibility that inflation will ease going ahead as food prices ease. But a lot will depend on whether food prices will ease. In December, food inflation rose to 12.16 percent from 8.73 percent in the previous month.

The core inflation (excluding volatile food and fuel components), too has inched up a bit in December. The core inflation, at 3.54 percent, is the highest since November last year. Sticky core inflation would further add to the worry of the central bank. This is because food and fuel prices typically fluctuate and may change month to month but core inflation indicates the larger trajectory.

 CPI inflation at over 5-year high: RBI likely to be cautious before next rate cut; has a tough task ahead to balance growth, rising prices

“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 percent in the ongoing month,” said ICRA in a note.

While the higher-than-expected inflation immediately puts the central bank on a cautious path, the RBI may not hike rate in the next RBI policy, a rate cut that should have ideally come in the backdrop of constantly slowing economy too looks unlikely now. The RBI and the monetary policy committee (MPC) will watch for the next few months before taking a call on the stance, economists said.

“Considering the higher than the targeted level of inflation and the fiscal challenges with regard to the Government surpassing its fiscal deficit target, the RBI is likely to maintain its status quo on the policy rates in the forthcoming policy meeting. Going ahead, RBI’s monetary policy would remain contingent on the inflation trajectory and the government’s fiscal stance,” CARE Ratings said in a note.

The RBI has cut policy rate by a total of 135 basis points in the current rate cut cycle. The central bank is also looking at the fiscal scenario. If the government breaches the fiscal deficit target, which is a possibility in the present scenario, the RBI will have one more reason to continue with its cautious policy stance.

“Real rates have now turned negative at 220bps and the possibility of fiscal slippage in FY20 is a signal that the rate easing cycle has come to an end. However, we believe that it will be too soon for the RBI to change its stance to tightening as the inflation is more or less transient in nature amid the wide output gap,” said Emkay research in a note.

--With data support from Kishor Kadam

Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.

Updated Date: Jan 14, 2020 12:28:53 IST