So, it is hardly surprising that the RBI September inflation expectations survey showed households expecting inflation to rise by 40 bps over the next three months.  (REUTERS)
So, it is hardly surprising that the RBI September inflation expectations survey showed households expecting inflation to rise by 40 bps over the next three months. (REUTERS)

Inflation may rear its head again to appear in MPC’s policy frame

  • Investors’ complacency on inflation stems from the ongoing decline in core inflation across regions
  • Supply shortages due to extended monsoons in India led to a sudden spike in onion prices, followed by a surge in tomato prices

Thanks to the global slowdown, geopolitical tensions and loosening policy rates, inflation isn’t something that global investors are currently worried about.

In fact, Bank of America Merrill Lynch’s latest global fund manager survey showed that a net 4% of investors were expecting higher global consumer price inflation in the next 12 months. This complacency stems from the ongoing decline in core inflation across regions. Core inflation is calculated by excluding food and energy prices from headline inflation, considering the volatile prices of these items.

Graphic by Sarvesh Sharma/Mint
Graphic by Sarvesh Sharma/Mint

However, DBS Bank cautioned that globally, food and metals have bottomed out, while energy prices were about to join them. So, inflation won’t be a support for further decline in interest rates, going ahead. Rather, investors should brace themselves for some negative surprises.

“Ignoring domestic idiosyncratic factors like pork price in China and onion price in India, we consider the global commodity price dynamic along a range of important items. Across rice, soybean, as well as base and precious metals, there are no major technical or fundamental reasons for further disinflation," DBS Bank said in a report.

Supply shortages due to extended monsoons in India led to a sudden spike in onion prices, followed by a surge in tomato prices. So, it is hardly surprising that the Reserve Bank of India’s (RBI) September inflation expectations survey showed households expecting inflation to rise by 40 basis points (bps) over the next three months, and by 20bps over a year. One basis point is one hundredth of a percentage point. Further, some members of the RBI’s monetary policy committee (MPC) also highlighted the upside risks to inflation in the latest minutes.

“We believe that the comfort that the MPC members have drawn from lower inflation is likely to be challenged in coming months. Poor growth amid higher inflation and having delivered a 135bp of policy easing implies that there won’t be easy answers for MPC members come December. The key question for the MPC will be whether the potential downside risks on growth outweigh the upside risks on inflation," research house Nomura said.

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