Retail inflation rises to 4.62%

India’s retail inflation unexpectedly quickened to a 16-month high at 4.62%, exceeding the central bank’s medium-term target for the first time since July 2018, as prices of kitchen staples such as onion and tomato skyrocketed.

The inflation number exceeded the 4.35% median estimate of 34 economists in a Bloomberg survey, as also the central bank’s 4% target. Retail inflation stood at 3.99% in the previous month.

Food inflation accelerated to 7.89% in October from 5.11% a month ago, mostly due to a 26.1% surge in vegetable prices. The trend is likely to continue at least till March because of food price deflation during the year-earlier period.

However, core retail inflation, excluding food and fuel prices, moderated to its lowest in 94 months at 3.47% in October from 4.02%, driven by a favourable base.

Supply disruption after floods and unseasonal rain in many states have led to a rise in onion and tomato prices. After banning exports of onions and putting stock limits for local traders, the centre has decided to import the essential kitchen ingredient to curb rising prices.

“The government has decided to import 100,000 tonnes of onions to control onion prices. MMTC will make the imported onions available for distribution in the country from 15 November to 15 December and Nafed has been entrusted with the responsibility of distributing the onions to every part of the country,” consumer affairs minister Ram Vilas Paswan tweeted on 9 November.

However, the surge in food prices is unlikely to deter the Reserve Bank of India (RBI) from cutting policy rates in its December meeting, with a set of macro-economic data pointing towards sharper-than-expected deceleration of the Indian economy.

India’s factory output shrank 4.3% in September, recording its worst show since at least April 2012. This could mean GDP growth is likely to have slowed to less than 5% in the quarter ended September, data for which is to be released on 29 November.

Nomura and the State Bank of India have projected September quarter GDP growth to decelerate to 4.2% from 5% in the June quarter of FY20. Brokerage Nomura last week cut its overall GDP growth forecast for FY20 to 4.9% from 5.7% estimated earlier, the lowest so far among forecasting agencies.

“Although headline inflation in October has breached the central point of RBI’s inflation targeting framework, the increase is due to seasonal items and strong base effect. With economic growth slowdown, we believe growth concerns will dominate in RBI’s monetary policy review and RBI will continue with accommodative policy and expect further rate cut in the policy review of December,” said Devendra Kumar Pant, chief economist at India Ratings.

DBS Bank economist Radhika Rao said even as inflation runs above RBI’s forecasts, the weaker run-rate for growth will dissuade the MPC from put the brakes on its rate-cutting cycle and ease rates by 25 bps in December. “Unlike past episodes where supply shocks could lead to generalized price pressures, weak consumption and soft confidence surveys lower the risks of a broader pickup in prices in the near-term,” she added.

However, Madan Sabnavis, chief economist at CARE Ratings, said he expects a pause from the RBI.

“Based on the tone of the earlier statements, there should be a pause in rate cuts. However if lower growth is the overbearing reason, it can be considered. A pause would sound logical as the effects of the earlier cuts have not yet been seen even in the bond market,” he added.