India December retail inflation climbs to five-month high of 5.59%

·7-min read
Customers buy vegetables from a stall at a market in Ahmedabad

BENGALURU (Reuters) - India's retail inflation accelerated to a five-month high in December, but the central bank is widely expected to hold on key policy rates next month amid concerns the fast-spreading Omicron variant of COVID may impact economic activities.

Consumer prices, buoyed by rising prices of food and manufactured items, rose 5.59% in December from a year earlier and compared with 4.91% in the previous month, Ministry of Statistics data showed on Wednesday.

COMMENTARY

TANVEE GUPTA JAIN, CHIEF INDIA ECONOMIST - UBS, MUMBAI

"We expect CPI inflation to remain elevated in the 5.5%-6% range until April 2022. We believe the surging COVID-19 cases in India and the consequent supply-side disruptions along with rising input costs pressures will keep inflation higher over the coming months."

"We think India's Monetary Policy Committee is facing a tough choice. We believe if risks surrounding the new Omicron variant persist in the upcoming weeks, compounding near-term uncertainties, MPC could remain in a wait-and-see mode at the February 2022 policy meeting and could delay policy normalisation (a shift to a neutral stance followed by a reverse repo rate hike) until the April meeting."

UPASNA BHARDWAJ, SENIOR ECONOMIST - KOTAK MAHINDRA BANK, MUMBAI

"The December headline inflation was softer than expectations, largely led by food inflation. The overall falling sequential momentum on food prices is further expected to continue in January as well but the sticky core inflation and adverse base effect poses risk of the next reading being higher than 6%."

"Overall, as global financial markets are tightening and inflation remains a worry, we expect the RBI to also take more aggressive measures in the months ahead. While spread of Omicron risks postponing the decision, we continue to believe 40 bps of reverse repo rate hike will happen between the February and April policy."

SAKSHI GUPTA, SENIOR ECONOMIST - HDFC BANK, GURUGRAM

"As expected, CPI inflation in December jumped by 70bps to 5.6% as the favourable base effect wore off. Core inflation continued to print above 6% while food inflation doubled to 4%."

"As the Omicron impact seeps in, containment measures are yet again likely to impact supply chains and put upward pressure on inflation. Moreover, elevated crude oil prices (now above $80 per barrel) are likely to push up fuel inflation."

"We expect inflation to average at 5.9% in Q4."

"We expect the growth imperatives to continue outweighing inflation concerns. With a downside risk to growth due to the Omicron impact, the RBI might postpone a reverse repo rate hike to FY23."

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST - L&T FINANCIAL HOLDINGS, MUMBAI

"CPI inflation has sharply increased from 4.9% to 5.6% in a month's time, partly due to waning of the favourable statistical base as well as partly due to sticky core inflation at 6.2% and elevated fuel inflation despite the reduction in fuel taxes.

"In fact, urban inflation is hovering near 5.8%, signalling supply side disruption."

"Weakness in growth and aggregate demand will prompt RBI to stay accommodative for a longer time, even as interest rates have started adjusting to signals coming from inflation, liquidity and global developments."

"This will make RBI's role more challenging."

KUNAL KUNDU, INDIA ECONOMIST - SOCIETE GENERALE, BENGALURU

"While inflation remains barely within RBI's target range of 2.0%-6.0%, it remained above the median level of 4% for over two years now, indicating the central bank has decisively ditched the median target in its effort to get growth of the pandemic struck economy back on track."

"However, persistence of inflationary pressure is what the central bank will have to deal with sooner than later. A third wave of infections and another round of supply chain disruption could further fuel inflationary pressure."

"While we continue to believe that RBI would opt for its first rate hike during 2Q22, it raises the prospect of the rate hike being pushed back to June 2022 rather than April 2022, by which time the economy would decisively come out of the disruptive effect (though we expect it to be mild) of the third wave."

RADHIKA RAO, ECONOMIST - DBS BANK, SINGAPORE

"December CPI inflation quickened on a Y/Y basis, with non-food components as a dominant driver of price pressures. Sequential decline in food and lower pump prices were offset by adverse base effects, significant telecom price hikes, commodity price rises, firms passing on price increases and demand restoration."

"Core inflation (ex food and fuel) proved to be sticky, hovering at 6% for the third consecutive month. The evolving trend will keep inflation elevated in the March 2022 quarter, testing the upper bound of the target range."

"The next policy review will be soon after the Union Budget, allowing the committee to take stock of the state of the pandemic, economic impact and direction of the fiscal math. Less adverse economic fallout of the third wave, above target domestic inflation and a hawkish turn in the global policy cycle is likely to feed policy tightening expectations."

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST - AXIS CAPITAL, MUMBAI

"CPI inflation at 5.6% indicates the benefit from tax cut in fuel and edible oil was partially offset by stronger pass-through of input costs in core CPI components such as clothing and footwear, household goods and services and personal care."

"Looking ahead, the third wave is likely to keep input cost pressures elevated while the domestic economy absorbs these price increases gradually rather than at one go due to demand slack. CPI is likely to breach the 6% mark in coming months due to weak base and steady pass-through of input costs."

SUVODEEP RAKSHIT, SENIOR ECONOMIST - KOTAK INSTITUTIONAL EQUITIES, MUMBAI

"CPI inflation at 5.6% was marginally lower than market expectations, mainly on account of lower-than-expected food prices. Much of the uptick from last month's 4.9% was on the back of unfavourable base effect which will continue into next month too. Core inflation continued to remain high around 6.2% and will trend lower gradually."

"We continue to expect the RBI to be gradual in reversing the repo rate (possibly in August or October) and could favour a 20 bps hike in reverse repo rate in February. However, given the surge in COVID-19 cases, the February call for reverse repo rate hike could be at some risk with the RBI choosing to wait it out and raise it in the first policy of FY2023 in April."

SREEJITH BALASUBRAMANIAN, ECONOMIST - IDFC AMC, MUMBAI

"The 5.6% December CPI print, below consensus and our expectation, was mainly driven by the sequential fall in food prices led by vegetables. Core inflation sequential momentum eased a bit as, prima facie, there seems to have been not much of a pass-through from the recent telecom tariff hikes and from the expected pressure on electricity prices."

"While real-time prices of vegetables, pulses and edible oils are easing further in January, any impact of the recent rise in COVID-19 infections on inflation, particularly on core inflation as seen in May 2021, and on global supply chains which have just started to unclog, will be important."

GARIMA KAPOOR, ECONOMIST - INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI

"While today's CPI print suggests the seasonal decline in food prices has begun to finally materialize, unfavourable base and elevated core inflation amid continued supply side bottlenecks due to Omicron will keep the headline print elevated around 5% over the next couple of months."

"With the resurgence of the pandemic and resulting disruptions in economic activity, our call for a February 2022 hike in reverse repo now looks uncertain. We expect MPC to be in wait-and-watch mode in February policy and we push the reverse repo hike expectation to April 2022. We retain our projection for first repo rate hike in Q2FY23."

(Reporting by Rama Venkat, Shivani Singh, Chris Thomas, Chandini Monappa and Anuron Kumar Mitra in Bengaluru; Editing by Krishna Chandra Eluri)

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