Retail inflation rises sharply to 3.99% in September, but analysts predict a sixth consecutive interest rate cut in December

India’s retail inflation rose close to the central bank’s medium-term target of 4 percent in September for the first time in 14 months, but analysts still predict a sharp economic slowdown will prompt a sixth consecutive interest rate cut in December. Experts weigh in with their comments: Madhavi Arora, Economist, Edelweiss Securities, Mumbai The uptick in September was backed by a sharp sequential uptick in food components, primarily led by vegetable prices. We think the food inflation seasonal uptrend will likely continue in the near term before easing later. We see headline inflation averaging around 3.7 percent-3.8 percent for FY20 and expect the headline print to fiddle above 4 percent in the early part of 1HCY20, but not significant enough to derail the rate-cut cycle. Some signs of sequential bottoming of food prices are emerging, while there could also be increased policy focus ahead to correct food anomalies to favour agriculture terms of trade. On the other hand, we continue to see core inflation component fiddling a tad above 4 percent average in FY20, but admittedly moderating sharply from 5.8% in FY19. That said, the output gap remains significant, we continue to see the rate cut cycle extending beyond October by at least another 50 bps, depending on the incoming data ahead.” Sunil Kumar Sinha, Principal economist, India Ratings, New Delhi Reflection of higher inflation in select food items has now begun to show in retail inflation as inflation in meat and fish, vegetables, and pulses jumped in September 2019. Vegetables and pulses contributed 76.4 percent of the increase in retail inflation in September over August. Food inflation would continue to rise at least till March 2020 mainly due to base effect. The other items exerting pressure on retail inflation in September 2019 are expenditure on health, education and personal care. Given the ongoing slowdown in the economy and retail inflation remaining well within the target range of the RBI, India Ratings and Research believes RBI will continue with accommodative policy and expect a further rate cut in the policy review of December 2019. Joseph Thomas, Head Research, Emkay Wealth Management, Mumbai It is mainly prices of vegetables and pulses that have pushed the (inflation) rate higher. With a good monsoon having come to a close, its moderating impact may be felt on the price level due to improved supply of produce. At this juncture, this may not be of much consequence to the official accommodative policy. A persistence of prices at higher levels beyond the ameliorating influence of the rains may alone invite a policy shift to neutrality. [caption id=“attachment_4225879” align=“alignleft” width=“380”]  Representative image. Reuters.[/caption] Sakshi Gupta, Assistant Vice President, HDFC Bank, Gurugram The increase in CPI has been driven by a rise in food inflation, especially in urban areas. Our sense is that this spike is transitory. Fuel and core inflation continues to remain low and will keep the overall CPI trajectory in check. We continue to expect the RBI to lean towards pushing growth and deliver further rate cuts this year. Rahul Gupta, Currency Research Head, Emkay Global Financial Services Limited India’s September CPI surged to 3.99 percent from 3.21 percent in August, the market was expecting 3.70 percent. The uptick in food and fuel inflation has led to a surge in CPI print. Due to heavy and unevenly distributed rains onion and tomato prices have skyrocketed. Despite this rise in food inflation, with headline inflation currently below RBI’s medium-term target of 4 percent, we expect the central bank to lower rates to revive growth. Anagha Deodhar, economist, ICICI Securities, Mumbai The increase in inflation is mainly due to rising vegetable prices. Onion prices shot up during September due to supply disruption. Hence, the rise in inflation was expected. Now, tomato prices have also started rising sharply. So, this trend could persist in October as well. We had expected inflation to breach 4 percent by November, but it happened two months earlier. If vegetable prices remain high in the coming weeks, full-year inflation could be higher than 3.65 percent. Suvodeep Rakshit, senior economist, Kotak Institutional Equities, Mumbai The increase in CPI inflation to 3.99 percent in September is mainly on the back of food prices, especially urban food inflation, even as low rural food inflation keeps the overall food inflation under check. The increase in food prices has been due to a spurt in vegetable and pulses prices, which will most likely be transient. Core inflation continued to soften due to the impact of lower fuel prices and, to some extent, gold prices. It will likely soften further as rural health and education inflation normalize over October-December. Overall, with the CPI inflation on track to be around the 4 percent mark over the next few quarters, the RBI will continue to focus on the growth trajectory as demand conditions remain weak. We continue to expect the RBI to have room for another 50 bps of rate cuts by end-FY2020. Rupa Rege-Nitsure, Group Chief Economist, L&T Financial Services, Mumbai While the CPI print looks higher at 3.99 percent, it is entirely on the back of sharp spikes in the prices of vegetables, meat and fish, and pulses. Core inflation, which is a proxy for demand conditions has collapsed to 4.01 percent. On a year-on-year basis, it has come off by 181 bps. WPI core has already become negative. Prices of perishables like vegetables and meat will get normalised as soon as monsoon-related transport disruption is over. Pulses too may not pose any risk, as conditions for Rabi pulses are highly favourable due to healthy water reserves. The RBI will pay close attention to weak IIP print and demand slowdown. A possibility of rate-cut certainly exists, but its magnitude will depend on how HFIs behave in Q3, FY20. Garima Kapoor, economist and Vice President, Elara Capital, Mumbai The recent increase in headline CPI print has been on account of firming up of food inflation, especially in urban areas. The arrival of Kharif harvest and prospect of a good Rabi crop owing to the comfortable water table in reservoirs means that food prices are expected to cool from November onwards, helping inflation to trend back to RBI’s (Reserve Bank of India) projected levels and providing room for the RBI to cut rates. We expect the MPC (Monetary Policy Committee) to cut policy repo rate by another 50 bps until FY20-end with a 25 bps cut in December. All high-frequency indicators of demand indicate soft demand conditions. While low stable inflation is generally good, there is an urgent need for some inflation in the food economy that would help improve terms of trade of the rural economy, thereby supporting demand.