India’s inflation rate inches up but remains well below target

[MUMBAI] India’s inflation rate picked up in November from a record low in the previous month, but stayed well below the central bank’s 4 per cent target, leaving scope for further interest rate cuts in the new year.

The consumer price index (CPI) rose 0.71 per cent from a year earlier, the Statistics Ministry said on Friday (Dec 12), largely in line with the median estimate of 0.7 per cent in a Bloomberg survey of economists.

Inflation was at an all-time low of 0.25 per cent in October.

The Reserve Bank of India (RBI) cut interest rates by 25 basis points last week and signalled its willingness to ease monetary policy further, citing soft inflation readings. It expects inflation to climb from January and sees the CPI averaging 2.9 per cent in the three months till March.

Food prices, which make up about half of the consumer basket, fell 3.9 per cent. This compares with a record 5 per cent decline in October.

The drop likely reflected last year’s high base and improved supplies after above-normal rains. Vegetable prices fell 22.2 per cent, easing from a 27.6 per cent contraction in October.

Consumption tax cuts by the government also helped keep overall prices in check. Core inflation, which excludes volatile food and fuel, slowed to 4.42 per cent last month, compared with 4.49 per cent in October, based on Bloomberg Economics’ calculations.

There is still “room for the RBI to deliver another rate cut in the February policy, if growth shows signs of losing momentum after the festive season”, said Sakshi Gupta, economist with HDFC Bank.

Food prices are on the decline owing to ample supply, and are sinking despite an uptick in dairy, fruit and protein prices.

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The RBI expects inflation to stay comfortably below its 4 per cent target until at least September. A scheduled review of its mandate in March may see the government extend the current 2 to 6 per cent target band for another five years.

Benign inflationary conditions will continue to provide “ample policy space for monetary easing, with or without rate cut, well into the next fiscal year as well”, said Rajni Thakur, economist with L&T Finance.

A slight upward bias in inflation was expected after October’s record low, and economists said the latest print is unlikely to alter the RBI’s policy path.

The central bank will get the December reading before its February policy meeting, which should help it gauge underlying inflation more clearly once the festive-season boost fades.

Even as the data-dependent central bank has kept its options open, “the rate cutting cycle is clearly nearing the end, followed by a prolonged pause”, said Upasna Bhardwaj, economist with Kotak Mahindra Bank. BLOOMBERG