• India
  • Jan 14

Inflation zooms past RBI's comfort level

Retail inflation rose to a five-and-a-half-year high of 7.35 per cent in December 2019, surpassing the RBI’s comfort level, mainly due to the spiralling prices of vegetables such as onions.

The unexpected jump in inflation diminished the chances of the RBI cutting interest rate at its next monetary policy review due in early February.

As per the data released by the National Statistical Office (NSO) on January 13, the spike in inflation in the vegetable segment was 60.5 per cent during the month compared to December 2018.

The overall retail inflation based on Consumer Price Index (CPI) was 2.11 per cent in December 2018 and 5.54 per cent in November 2019.

As per the NSO data, the overall food inflation rose to 14.12 per cent last month as against -2.65 per cent in December 2018. The food inflation was 10.01 per cent in November 2019.

The previous high in retail inflation was witnessed at 7.39 per cent in July 2014, the year the Narendra Modi-led government assumed office for the first term.

The inflation in ‘pulses and products’ was recorded at 15.44 per cent, while in the case of ‘meat and fish’, it was nearly 10 per cent.

The Union government has mandated the RBI to keep inflation in the range of 4 per cent with a margin of 2 per cent on either side.

The RBI, which mainly factors in the CPI-based inflation, is scheduled to announce its next bi-monthly monetary policy on February 6. The RBI, which has been reducing rates, had kept the repo rate unchanged in December citing inflationary concerns.

Icra principal economist Aditi Nayar said the revision in rail fares, uptick in prices of some categories of automobiles and an unfavourable base effect may contribute to a further uptick in the core inflation to around 4 per cent in the ongoing month.

“Even though we expect the headline CPI inflation to correct sharply in January and further in February, from the unpalatably high 7.35 per cent recorded in December, it is expected to remain sticky above 4.3 per cent in the next few quarters,” she said.

Moreover, the concerns surrounding a higher core inflation trajectory are likely to be adequate for the Monetary Policy Committee (MPC) to remain on hold in its February policy review, along with a possible change in stance from accommodative to neutral, she said.

With the CPI inflation breaching the MPC’s target of 6 per cent for the first time in the past 41 months, there is little scope for the MPC to continue with monetary policy easing at least in the short term, said M. Govinda Rao, chief economic advisor, Brickwork Ratings.

Commenting on the latest number, industry body PHD Chamber said the rise in inflation rate is not sustainable and the average inflation should remain at around 5.5 per cent for the current financial year.

Going ahead, the chamber will look forward to the continuation of softer stance of monetary policy by the RBI to spur investments and consumption demand in the coming times.

Analysts warn of stagflation

“Along with slowing growth, more-than-desirable inflation raises the sceptre of stagflation,” warned analysts at rating agency Crisil.

A ‘stagflation’ is an undesirable phenomenon which has persistently high inflation with high unemployment and a stagnancy in demand.

Analysts at Crisil explained that food is the noisemaker at present and if one were to exclude vegetables and pulses, which have resulted in the spike, food inflation comes at 5 per cent, which is still at a 33-month high.

The core inflation, which is price rise excluding food and fuel, also runs the risk of getting impacted because of the rise in telecom prices, it said.

Care Ratings also flagged the high fiscal deficit, which induces inflation, is also a concern. It can be noted that there are calls for looking over the fiscal deficit concerns to push up the growth process ahead of the Union Budget scheduled for February 1.

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