India’s inflation slide, rupee slump complicate rate outlook
INDIA’S inflation eased last month, while the rupee plunged to a new record low, giving the central bank reason to remain cautious even as most analysts predict interest rate cuts from February.
The consumer price index rose 5.22 per cent in December from a year earlier, data from the statistics ministry showed on Monday (Jan 13), remaining well above the Reserve Bank of India’s (RBI) 4 per cent target. The median forecast in a Bloomberg survey of economists was for inflation to slow to 5.3 per cent from 5.48 per cent in November.
The yield on the 10-year government bond had climbed by seven basis points to 6.85 per cent earlier Monday, and stayed unchanged after the inflation data.
Moderating inflation has boosted expectations that newly-appointed governor Sanjay Malhotra will cut interest rates in February to support a slowing economy. The RBI has kept interest rates unchanged for nearly two years now.
However, geopolitical factors, including a surge in oil prices and US dollar, make it difficult to predict the direction India’s monetary policy will take in the coming months. The rupee has plumbed record lows in recent weeks, and plunged past a key psychological level of 86 per US dollar on Monday.
Along with a weaker currency, Asia’s third-largest economy, which imports nearly 90 per cent of its oil, is also staring at higher energy prices, which can push up its import bill. Aggressive sanctions by the US on Russia’s oil industry could force India to source more expensive crude from the Middle East, West Africa or North America.
Food inflation
Food prices, which make up about half of the consumer price basket, rose 8.39 per cent from a year earlier, after climbing 9.04 per cent in November. Vegetable prices rose 26.5 per cent from a year earlier, compared to a 29.3 per cent rise the previous month.
Excluding volatile food and fuel prices, the core measure of inflation eased 3.64 per cent, compared with 3.72 per cent in the previous month, according to calculations from Bloomberg Economics.
With Monday’s reading, the probability of a rate cut in February has “certainly receded”, said Aditi Nayar, chief economist at ICRA. However, the decline in vegetable prices could convince some members of the monetary policy committee to “consider an early cut in the upcoming meeting, with a view to supporting growth”, she added. BLOOMBERG
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