India retail inflation eases to 3-month low but no rate cuts expected yet

INDIA’S retail inflation rate touched a three-month low of 5.1 per cent in January as prices of some food items rose more slowly, data showed on Monday (Feb 12), although the central bank is expected to wait before cutting rates as inflation remains above its target rate.

Annual retail inflation eased in January from 5.69 per cent in December, government data showed, and was in line with a 5.09 per cent forecast by a Reuters poll of 44 economists.

Last week, the Reserve Bank of India (RBI) left interest rates unchanged, signalling that cuts may be some time away as it focuses on getting inflation to 4 per cent on a sustainable basis.

Food inflation, which accounts for nearly half of the overall consumer price basket, rose 8.3 per cent in January, compared with a 9.53 per cent rise in December.

Prices of cereals rose 7.83 per cent year on year in January compared with 9.93 per cent in the previous month, while vegetable prices rose 27.03 per cent compared with 27.64 per cent in December, the data showed.

“Consumer price index inflation came in slightly softer than our expectations,” said Upasna Bhardwaj, chief economist at Mumbai-based Kotak Mahindra Bank.

But uncertainties about food inflation are likely to keep the central bank “cautious in the near term”, she said.

The central bank forecasts retail inflation at an average of 5.4 per cent in the current fiscal year ending in March, and at 4.5 per cent for the next fiscal year.

Core inflation, which strips out volatile food and energy prices, is estimated at 3.6 per cent in January, compared with 3.8 to 3.89 per cent in December, according to two economists.

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“Housing inflation remains weaker than expected, despite strong urban demand,” said Gaura Sen Gupta, an economist at IDFC First Bank.

The Indian government does not release core inflation figures.

Core inflation has fallen despite strong growth in the economy.

India posted faster-than-expected economic growth of 7.6 per cent in the July-September quarter compared with a year earlier, after growing 7.8 per cent in the previous quarter. The government forecasts annual growth of 7.3 per cent in the fiscal year ending in March.

Volatile food prices

Food price shocks have been the main driver of inflation in the past year, due to climate vagaries and supply shocks due to geopolitical tensions.

Last week, the RBI said large and repetitive food price shocks were interrupting the pace of disinflation.

India lowered the stock limit of wheat that traders can hold to increase the grain’s availability and moderate prices. It has banned exports of wheat, some grades of rice and onions to contain inflation.

Some economists expect moderating food prices could help ease pressure on retail inflation.

“Price pressures are easing in earnest, and we think rate cuts will come onto the agenda in the second half of the year,” Shilan Shah, deputy chief emerging markets economist at Capital Economics, said. REUTERS