Retail inflation jumped to a 40-month high in November on higher food prices, while industrial output contracted 3.8 per cent in October from a year earlier, data showed on Thursday.
Higher prices has reduced the likelihood of the Reserve Bank of India cutting interest rates in February.
Food inflation rose sharply as unusually heavy rains at the end of the
season hit crop yields and caused a spurt in prices of vegetables such as onions, Reuters reported.
This is the second month in a row when the retail inflation has remained above the central bank’s medium-term target of 4%.
Analysts polled by Reuters had forecast October industrial output to fall 5%.
Here are Dalal Street experts and economists’ reactions to the macro numbers released on Thursday:
Aditi Nayar, Principal Economist, ICRA
While the CPI food inflation rose to an uncomfortably high 10% in November 2019, a moderation in vegetable prices should douse food inflation to a large extent in early 2020. The sharp uptick in the headline CPI inflation in November 2019 justifies the pause undertaken by the prescient
(MPC) in its last policy review. We expect the CPI inflation to spike further to 5.8%-6.0% in December 2019, close to the upper threshold of the MPC’s medium-term target, driven by the recent revision in telecom tariffs. As a result, we expect the MPC to remain on hold in its February 2020 policy review.
Ranjan Chakravarty, Economist & Product Strategist at Metropolitan Stock Exchange
The level that IIP has reached is clearly unacceptable. It is the symptom not of a cyclical adjustment or a shock, but that of a fundamental weakening on the supply side of the economy. That the crisis has spread from the demand to the supply side is regrettable, largely because it was avoidable. Simply had aggressive rate cuts been carried out while there was still plenty of time, this situation would not have occurred. It is still not too late, though it is the eleventh hour, and we urge a very strong rate easing regime be implemented forthwith in order to still rescue the growth story.
Rupa Rege-Nitsure, Group Chief Economist, L&T Financial Services
IIP-CPI mix clearly signals that India is entering into a kind of ‘Stagflationary’ phase. This certainly vindicates the RBI’s pause in rate cutting cycle.
Sakshi Gupta, Assistant Vice-president, HDFC Bank
The higher inflation print for November was driven by transitory factors such as increase in food inflation while core inflation continued to remain subdued, signalling that demand conditions in the economy remain anaemic. Going forward, we expect the food spikes to perhaps moderate from January 2020 onwards, although increase in telecom tariffs and any increase in GST rates could put upward pressure on core inflation. On the balance, we expect inflation readings to remain above 5% until February 2020. Consequently, we expect the Reserve Bank of India (RBI) to stay on hold in its February meeting and probably deliver another cut in the April-June 2020 quarter.”
Deepthi Mary Mathew, Economist, Geojit Financial Services
The inflation rate at 5.54 per cent is heading towards the upper limit set by RBI at 6 per cent. However, this surge in inflation was expected with the skyrocketing prices in vegetables, as food and beverages has a share of around 45 per cent in
(CPI). The worrying fact is the low core inflation rate that is not showing any signs of improvement at 3.5 per cent. It reflects the tepid demand in the economy.
Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers
At over 5.5% retail inflation is clearly much ahead of our expectations. But this is again due to the non-core part, mainly vegetables. Core inflation remains benign and trending downwards. The IIP number, although negative, is better than expected given that in October there are several holidays when factories were shut. This reflects a reasonably good festive sales and perhaps clearing of inventories. While the large part of food inflation is likely to soften over the next two months, we expect the trend inflation to remain elevated. Average inflation in 2020 at 4-4.5% range would be much higher than in 2019. With the likely bottoming of growth and elevated inflation as well as concerns on large fiscal slippages, the policy rate may remain in hold in FY20.
Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services
Higher inflation and weak IIP continues. As expected, core inflation reverses trajectory. Headline CPI inflation was slightly higher than our and market expectations of 5.3%. Separately, IIP declined 3.8% in October – better than our expectation of -4.7% (and market consensus of 5%). Overall, new data suggest continuation of the combination of weak growth and higher inflation. Our economic activity index (EAI) suggests that October 2019 was the worst month on the current cycle but things have improved in November 2019. It is hard to tell yet if the recovery is strong enough to lead to 4.5% growth in 3QFY20.
Vivek Kumar, Senior Economist, YES Bank
CPI inflation surprised on the higher side with November print of 5.54% coming close to the upper end of the inflation targeting band. Like previous month, the surge was predominantly led by food and fuel categories while core inflation momentum continues to remain subdued around 3.5%. In the near term, pressure on inflation could persist because of inadequate food supplies, recent sharp hike in telecom tariffs. We expect CPI inflation to average close to 5.3% and 5.5% in the third and fourth quarters of FY20, respectively.
Madan Sabnavis, Chief Economist, Care Ratings
There is no clarity on what the right inflation number is… From January onwards there would be moderation in inflation as the onion crop comes in which will then open the doors for rate cuts. However, we may not expect rate cuts to work as the problem is on the demand side and
has reached its limit and we may be in a liquidity trap.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities
CPI inflation in November continued to be impacted by higher food inflation. This is primarily due to supply-led higher prices of vegetables and pulses. Core inflation at around 3.4% remained benign implying that demand-led inflation remained low. Over the next few weeks, part of the food inflation will be favourably impacted as new supply of vegetables hits the market. Based on the RBI’s MPC thought process on the latest policy response, and our expected evolution of the inflation trajectory, the MPC is unlikely to cut repo rate in the February policy and possibly in subsequent policies too.
Rahul Gupta, Head Of Research – Currency, Emkay Global Financial Services
At this month’s policy, RBI refrained from cutting rates due to uptick in CPI despite slow growth. If inflation continues to rise further, then RBI may continue to maintain a pause at the February policy.
Prithviraj Srinivas, Chief Economist, Axis Capital
Current trends indicate that CPI inflation will peak out at 5.8% in January 2020 with inflation easing to 5.5% by March 2020. However, we could be surprised by the speed of the decline given that the upturn has been mainly led by volatile vegetables. Once headline CPI begins to peak and shows a sustained trajectory towards 4%, the central bank would be more willing to use up remaining rate cut space (we estimate 65 bps) to support growth. I believe that the (rate cut) pause will be temporary given that growth remains below potential.