Core inflation remains sticky, H1 FY22 to see prices rise above RBI’s forecast

Food inflation decelerated to 8.8 per cent in November vs 10.1 per cent in October largely led by lower vegetables prices even as higher prices were seen in oil and fats segment.
Reserve Bank of India. (File Photo | PTI)
Reserve Bank of India. (File Photo | PTI)

Headline inflation is showing signs of easing, but the RBI remains on the battle bus to prioritise growth and price stability.  The latest inflation print at 6.9 per cent in November conforms to Reserve Bank of India’s forecast of 6.8 per cent and 5.8 per cent in December and March quarters. respectively, but analysts expect price rise to be 30-50 bps above the central bank’s average forecast of 4.9 per cent in H1 FY22. 

That’s because, in the near term, inflation trajectory is affected by Covid-19 related supply disruptions, including labour shortages, high transportation costs, cost-push pressures in the form of high taxes on petroleum products, and hikes in telecom charges. Even as near-term supply-side disruptions are getting addressed owing to easing of mobility restrictions and removal of constraints on inter-state movements, the recent farmers’ protests in few states could be somewhat of a dampener, according to UBS Securities.

“Going forward, we expect the central bank to keep the repo rate on hold in the rest of FY21. We think, any room for further policy easing (25 bps) will be dependent on either growth surprising significantly on the downside and/or inflationary pressures moderating significantly over the coming months on lower food prices,” said Tanvi Gupta Jain, economist, UBS Securities. 

Some even believe that retail inflation will likely traverse a deflationary phase in line with the global trend. If this happens, and growth continues to falter in the near future, the twin developments could compel RBI to reduce rates further.

“We expect deceleration of inflation in the next 12 months to be more pronounced than estimated by RBI. In contrast, we do not think that improvements in industrial production would continue. The simultaneous deceleration in growth and inflation would provide RBI the opportunity to resume lowering the policy rate in coming months. The more-than-expected hardening of global crude prices, however, remains a risk factor,” wrote the analysts at Anand Rathi. 

Food inflation decelerated to 8.8 per cent in November vs 10.1 per cent in October largely led by lower vegetables prices even as higher prices were seen in oil and fats segment. Core inflation, excluding food and fuel, though sticky eased by 5 bps to 5.8 per cent. Inflation in the transport and communication segment remained largely similar to the previous month. Excluding petrol and diesel, the calculated refined core CPI inflation also eased to 5.6 per cent.

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