Retail Inflation Surges 40-month High At 5.54%

Mumbai, December 12: The Consumer Price Index (CPI)-based or retail inflation has risen to a forty-month high of 5.54 per cent in November as compared to 4.62 per cent in the month of October, government data released on Thursday said. The latest numbers are three-year high figures which according to the government data was highest at 6.07 per cent in July 2016.

Rahul Gupta, Head of Research - Currency, Emkay Global Financial Services, says India’s November inflation has surged to 40-month high of 5.54 per cent, that is a 130 bps higher than RBI’s medium term target of 4 per cent. “This is mainly due to substantial increase in food prices. While October Index of Industrial Production (IIP) print still remains in contraction at -3.8 per cent. At this month’s policy, the Reserve Bank of India (RBI) refrained from cutting rates due to uptick in CPI despite slow growth,” Gupta said. If inflation continues to rise further then the Reserve Bank of India (RBI) may continue to maintain a pause at its February policy review meet.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers, says at over 5.5 per cent retail inflation is clearly much ahead of market expectations. But this is again due to the non-core part, mainly vegetables. Core inflation remains benign and is trending downwards. The IIP number, although in negative, is better than expected given that in October 2019 there are several holidays when factories were shut. This reflects a reasonably good festive sales and perhaps clearing of inventories.

While 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 per cent 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, Hajra said.

Ranjan Chakravarthy, Economist and Product Strategist at Metropolitan Stock Exchange, says 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,” Hajra said. It is still not too late, though it is the eleventh hour, and we urge a very strong rate easing regime be implemented in order to still rescue the growth story.

As the data suggest retail inflation comes at 5.5 per cent and weak IIP at -3.8 per cent, core inflation has reversed trajectory. Headline CPI inflation stood at 5.5 per cent on year on year basis in November 2019, slightly higher than market expectation of 5.3 per cent. Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services, said, “Food inflation rose to 10 per cent year on year basis and core inflation rose from record low of 3.3 per cent to 3.7 per cent last month.”

Separately, IIP declined 3.8 per cent year on year basis in October 2019 - better than expectation of -4.7 per cent, and market consensus of 5 per cent. “Details show while capital goods activity declined as expected, construction and consumer goods fell faster, which were more than offset by sharp surge in intermediate goods (+22 per cent),” gupta said.

Overall, new data suggest continuation of the combination of weak growth and higher inflation. According to Motilal Oswal Financial Services’ economic activity index (EAI), 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 greater than 4.5 per cent growth in 3QFY20.