Declining core inflation, which can often reflect weak demand in the economy, is a “conundrum” at a time of strong economic growth.
India’s annual retail inflation rose at the fastest pace in four months in December, driven by a rise in prices of some food items, raising expectations that the central bank will stay away from interest rate cuts for some time. To subscribe please click tau.id/2iy6f and access our live channel.
India’s annual retail inflation (INCPIY=ECI) rose to 5.69% in December from 5.55% the previous month, above the central bank’s 4% target, government data showed on Friday. A leading daily’s poll of 56 economists had forecast a rate of 5.87%.
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Food inflation, which accounts for nearly half of the overall consumer price basket, was at 9.53% in December, up from 8.70% in November as prices of vegetables, pulses and spices rose. Core inflation has declined to 48-month low of 3.89% in December 2023.
We expect inflation in January 2024 to decline to 5.3%-5.5% range mainly due to base effect. Strong economic growth and inflation averaging more than 5% in fiscal 2024 suggests a long pause in policy rates. Declining core inflation at a time of strong economic growth is a conundrum.
Despite the positive surprise on the inflation print, we do not see the Reserve Bank of India changing its stance in the February policy and continue to see a move on rates coming in the second quarter of fiscal 2025. Moreover, We expect food price inflation to decline only gradually over the coming months.
