Inflation shock after GDP growth slump
2 min read . Updated: 14 Jan 2020, 12:01 AM IST
Premium- RBI may be forced to rethink its accommodative policy stance as retail inflation accelerates to 7.35% in December
- Rising inflation and the growth slowdown are likely to give the Opposition ammunition to criticize the govt
New Delhi: Retail inflation shot to a five-and-a-half-year high of 7.35% in December, breaching the central bank’s tolerance limit of 6% and confirming fears raised by some economists that India is entering a phase of slow growth and rising prices.
December inflation was steeper than the 6.20% median estimate in a Reuters survey of economists and the fastest increase since July 2014. In November, retail inflation stood at 5.35%.
Galloping inflation could not only constrain the Reserve Bank of India (RBI) from further monetary easing in its policy review on 6 February, but may also force it to rethink its accommodative policy stance.
Policymakers will also have to contend with the looming threat of stagflation—a toxic combination of slowing growth and rising prices.
“Along with slowing growth, more-than-desirable inflation raises the spectre of stagflation (where inflation rises even as output and employment fall)," said D.K. Joshi, chief economist at Crisil Ltd.
Nikhil Gupta, chief economist at Motilal Oswal Financial Services, said it might be an exaggeration to say India has entered a phase of stagflation as growth is still higher than 4%. The debate over rate hikes may, however, get serious, he said, adding that if one considers “it (raising rates) in the backdrop of lower savings, the case will strengthen".
India’s economic growth slowed to a six-and-a-half-year low of 4.5% in the September quarter, but the statistics department has projected GDP growth to pick up in the second half to touch 5% overall in 2019-20. The gross savings rate in India has declined sharply from 34.65% in 2011-12 to 30.54% in 2017-18, led by the household sector.
Data released by the statistics department on Monday showed food inflation accelerated 14.12% in December from 10.01% a month ago as vegetable prices surged by 60.5%.
While soaring onion prices have significantly contributed to the high food inflation, rising prices of meat and fish (9.57%), egg (8.79%), milk (4.2%) and spices (5.76%) also contributed to the acceleration in retail inflation.
Under the flexible inflation targeting framework adopted in 2016, RBI accords primacy to the objective of price stability, while simultaneously focusing on growth when inflation is under control.
In a surprise move last month, RBI paused its rate-cutting cycle amid rising inflation risk. However, the monetary policy committee said that it would maintain the “accommodative stance as long as it is necessary", but made it clear that there was a need to optimize the impact of rate reductions.
Aditi Nayar, principal economist at ICRA Ltd, said that even though she expects the headline consumer inflation to slow sharply in January and further in February from the unpalatably high print in December, it is expected to remain sticky above 4.3% in the next few quarters.
“Moreover, the concerns surrounding a higher core inflation trajectory are likely to be adequate for the monetary policy committee to remain on hold in its February policy review, along with a possible change in stance from accommodative to neutral," she added.
RBI’s latest Inflation Expectations Survey of Households released last month showed three-month ahead and one-year ahead inflation expectations had increased sharply by 120 basis points and 180 basis points, respectively.
