Retail inflation accelerates to 7.59% in January; economists, bankers say RBI to be in hold mode in April

  • The rise in headline CPI inflation from 7.4 percent y/y in December to 7.6 percent y/y in January was faster than consensus

  • Data also showed industrial output contracted 0.3 percent in December from a year earlier

  • The sharp spike in food inflation has led January CPI to breach a six-year high of 7.59 percent compared to 7.35 percent seen in December

Bengaluru/New Delhi/Mumbai: Retail inflation accelerated to 7.59 percent in January, government data showed on Wednesday, higher than the 7.40 percent forecast in a Reuters poll of analysts.

Data also showed industrial output contracted 0.3 percent in December from a year earlier. Analysts polled by Reuters had forecast industrial output to rise 1.8 percent.

Experts weigh in with their comments:

Radhika Rao, Economist, DBS, Singapore

Base effects were most adverse in January, which has overshadowed the sequential deceleration in food prices. Impact of the rise in global food index, as well as higher protein sources, have contributed to the rise. Global food prices are also up. Price increases in telecom, medicines, steel, cement, etc. add to the mix, keeping core firm. This lends upside risk to the central bank’s quarterly projection for Q1. This reinforces our expectation that the central bank is on a prolonged pause, in contrast to market expectations for a resumption of cuts into FY 21.

 Retail inflation accelerates to 7.59% in January; economists, bankers say RBI to be in hold mode in April

Representative image. Reuters

Aditi Nayar, Principal Economist, ICRA, Gurugram

With a further hardening of the headline CPI inflation driven by a rise in the core print, coupled with only a mild decline in the food inflation ... the inflation for January 2020 is entirely unpleasant. Nevertheless, it is unlikely to materially alter the direction of monetary policy, with the MPC already having placed its forecast for the average CPI inflation in Q4 at a high 6.5 percent. However, today’s data suggests that the pause is likely to be extended further.

Sreejith Balasubramanian, Economist, IDFC AMC, Mumbai

The 7.6 percent y/y headline CPI was above our expectation of 7.3 percent due to slower disinflation in vegetables and price of pulses, milk and oils and fats trending higher. We expect the RBI to be on hold in April and continue its focus on transmission.

Darren Aw, Economist, Capital Economics, Singapore

The rise in headline CPI inflation from 7.4 percent y/y in December to 7.6 percent y/y in January was faster than consensus and just above our own forecast. An acceleration in fuel and core inflation more than offset a fall in food inflation. We think this will prove to be the peak for the headline rate. In the near term, the drop in global oil prices caused by fears over the coronavirus means that fuel inflation will keep a lid on the headline rate.”

Prithviraj Srinivas, Chief Economist, Axis Capital, Mumbai

CPI inflation has risen by 20 bps in January to 7.6 percentdespite a correction in the vegetable inflation ... The RBI had predicted March-quarter CPI inflation to average 6.5 percent. For this outcome to play out we need to see inflation fall rapidly from here. The central bank’s accommodative policy stance and room for further accommodation rests on inflation dropping like a stone in the coming months. The probability of such an outcome has become challenging now given higher imports duties, pressures to increase GST rates and supply shock form the coronavirus.

Shashank Mendiratta, Economist, IBM, New Delhi

At 4.16 percent, Singapore core inflation ticked higher from its October trough. However, in our assessment, headline inflation has now peaked and should glide lower starting February as the base turns favourable and vegetable prices respond further to harvest. We would continue to monitor protein prices which can impart upward bias to inflation. Nonetheless, despite declining, inflation prints for the next few months are expected to remain above 4.0 percent, i.e. midpoint of the RBI’s inflation target. As such, we expect the central bank to cut rates in the third-quarter meeting.

Rumki Majumdar, Economist, Deloitte India, Bengaluru

The contraction in December IIP raises concerns about the sustainability of the green shoots in industrial activities that were visible till last month. This does not bode well for the overall economy as global headwinds already pose significant challenges to overall industries. The large outbreak of the coronavirus in China can adversely impact India, as China is one of the largest trading partners. With several factories being closed down in China temporarily, the electronics and auto industries in India will likely be hit because of their dependence on Chinese imports of components and raw materials.”

Saksi Gupta, Senior Economist, HDFC Bank, Gurugram

Inflation print was driven by higher food prices, rise in medicine and telecom prices, and an unfavourable base effect. The January print is likely to be the peak as we have been already seeing a drop in onion prices in recent days. The base effect will fall off from February onwards. That said, I see core inflation numbers remaining above 4 percent over the coming months due to idiosyncratic factors such as tariff increases. Overall, inflation prints could come in above 6 percent for the coming two-three months, before moving within the 5-6 percent range until August.

The RBI could cut rates at the first opportunity they get - as soon as inflation optics look somewhat favourable (within their target band). They are likely to take comfort from their forward view of inflation falling to 3 percent by the end of the year. We expect the RBI to deliver a rate cut of 25 bps in the first quarter of the fiscal (April-June 2020).”

Rupa Rege Nitsure, Group chief Economist, L&T Financial Holdings, Mumbai

Growth-inflation mix has seriously deteriorated. While industrial production has contracted in line with our in-house expectations, a contraction in consumer goods production underscores the weakness in demand. This clearly means that the festival season uptick was short-lived. Headline CPI inflation is very high and contributed by both the food and fuel sectors. Even core inflation has increased to 4.21 percent by 45 bps. No wonder the RBI tried to provide stimulus thru other measures like CRR exemption and LTROs rather than through a blunt instrument of a repo rate. Today’s prints have increased the uncertainty around the RBI’s future actions. There will be a longer pause in the rate-cutting cycle now.”

Rahul Gupta, Head of Research-Currency, Emkay Global Financial Servies, Mumbai

The sharp spike in food inflation has led January CPI to breach a six-year high of 7.59 percent compared to 7.35 percent seen in December. It is the second consecutive month that CPI has breached the upper band of the RBI’s inflation target, while unexpectedly IIP has contracted to 0.3 percent in December from 1.8 percent, telecom prices in November. Due to higher inflation, the RBI has been maintaining a status quo since December 2019. If inflation continues to hover above 6 percent, we don’t expect the RBI to cut interest rate or change its accommodative policy stance.

Anagha Deodhar, Economist, ICICI Securities, Mumbai

Inflation has come in higher than our expectations. With January 2020 inflation at 7.6 percent, the MPC’s forecast of 6.5 percent, inflation in the fourth quarter is under threat. Inflation will have to average 6 percent in February-March to meet this forecast which is highly unlikely. Worryingly, food inflation is still in double digits. Core inflation has also jumped to 4.3 percent, mostly on the back of higher telecom tariffs and personal care costs. Given the sharp increase in headline and core inflation, the MPC is likely to stay put in the near future.

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Updated Date: Feb 13, 2020 08:09:31 IST