Inflation gathers pace, hits 15-month high of 4.88%: RBI rate cut unlikely even if growth slows, say experts

Annual retail inflation accelerated in November to a 15-month high of 4.88 percent, much stronger than the 4.20 percent expected by analysts, driven mainly by faster rises in prices of food and fuel products. Experts weigh in with their comments: A Prasanna, Economist, ICICI Securities Primary Dealership Both headline and core CPI were above our estimates by 20-40 bps on account of upside surprises in food items and services. While we expect food prices to reverse somewhat in coming months, the core (inflation) momentum is worrisome. This suggests that the slowdown in core (inflation) in Q1FY18 was a one-off. March CPI is tracking close to 5 percent compared to the MPC estimate of 4.7 percent. Even as we retain our view of a prolonged pause we will watch out for the evolution of core (inflation) momentum over the next few prints to reassess our view.” Mayank Prakash, Fund Manager, BNP Paribas Mutual Fund No chance for a rate cut anytime soon. There could be a long pause from the Reserve Bank now. In the next quarter the chances of inflation moving close to 5 percent are high, and with global headwinds such as the reduction of quantitative easing, the Reserve Bank may not change its stance till June next year.” [caption id=“attachment_4225879” align=“alignleft” width=“380”]  Representative image. Reuters.[/caption] Sunil Sinha, director and principal economist, India Ratings Inflation has accelerated at a pace much higher than what was expected. Clearly the pressure from inflation is becoming more apparent. In my view, the scope for any rate cut this fiscal (year) is completely ruled out. I do not see much of change in RBI’s stance in the next 6 months. If the inflation pressure continues beyond this level, one can expect the central bank to change its policy stance to hawkish, but that’s unlikely to happen anytime soon. Tushar Arora, senior economist, HDFC Bank The upside in vegetable prices have lasted a bit longer than earlier anticipated. We now expect inflation to remain above 4 percent in FY 2018 and in early FY 2019 as well. This means that the RBI shall stand pat even if growth continues to remain subdued. Naresh Takkar, Managing Director and Group CEO, ICRA With an intensification of the inflation risks related to commodities and perishables since the last review, the six-member Monetary Policy Committee (MPC) expectedly stayed on hold in the December 2017 policy, with a split vote of 5:1. Moreover, it retained the neutral stance of monetary policy, balancing a slight uptick in its inflation projection for H2 FY2018, with a retention of the GVA growth forecast, which essentially entails a sharp pickup in economic expansion in the latter half of the year. The tone of the policy document was not particularly hawkish, which mildly cooled the 10-year G-sec yield. Nevertheless, the expected uptick in CPI inflation spells a low likelihood of rate cuts in the immediate term. We expect an extended pause for the policy rate as a baseline scenario going into 2018. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI CPI inflation came in at 4.88 percent in November 2017, surpassing the already high expectations of the market. Compared to October 2017 all the categories have witnessed price increase with a substantial jump in food and beverage inflation. Housing and fuel and light component also contributed to the increase. Within food inflation, increase in price of vegetables and eggs have propelled the overall inflation substantially. Interestingly, the overall CPI inflation has come moderately above the core inflation after remaining below the core-CPI for 14 straight months. CPI excluding food has also increased to 5.30 percent compared to 4.78 percent in October 2017, thus indicating broad based increase in inflation. Meanwhile, Core CPI increased to 4.86 percent in November 2017 compared to 4.54 percent in October 2017. By looking at the data more deeply, we observed that inflation in Southern states is higher than other parts of the country. This is mainly due to higher rural inflation over urban inflation. We expect CPI inflation to breach the 5 percent mark in the upcoming months of this fiscal. CPI is likely to overshoot the RBI target in second half of FY18 even though growth projections are likely to undershoot its target. Aditi Nayar, principal economist, ICRA The uptick in the CPI inflation to a 15-month high in November 2017, was significantly sharper than expected, validating the caution displayed by the Monetary Policy Committee in its recent reviews. The hardening of retail inflation in November 2017 was broad-based, with negative surprises not restricted only to food items, but posted by many of the sub-groups. For instance, core inflation recorded a broad-based uptick to an eight-month high 4.9 percent in November 2017 from 4.6 percent in October 2017. Some of the factors driving the uptick in the retail inflation in November 2017 would prove to be transient, especially the spike in vegetable prices. Additionally, the impact of the reduction in GST rates on a number of items may pass through into retail prices and inflation in the coming weeks. However, the continued impact of the HRA revision on housing inflation and elevated fuel prices suggest that the CPI inflation is likely to print in a range of 4.4-4.7 percent in the remainder of FY2018. With the CPI being heavily weighted toward food items, the prices of which are sensitive to small changes in supply-demand dynamics, volatility in the monthly CPI inflation readings would persist. In our view, this would continue to impart a cautious bias to monetary policy setting in India. Our baseline expectation heading into 2018 remains of an extended pause for the policy rate.