A sharp increase in food prices pushed the Consumer Price Index (CPI), India’s benchmark retail inflation measure, to 4.6% in October, a 16-month high.
Analysts said the headline number probably conceals overall tepid demand in the economy, evident in non-food non-fuel inflation falling to its lowest level in the current series (since January 2012). Retail food inflation in October was 7.9%, the highest since August 2016. Retail inflation, excluding the food and beverages sub-group grew at just 2.7% in October. The food and beverages group has a share of 46% in the CPI basket. The 2.7% is the lowest ever value in the current series. Core inflation, which captures non-food non-fuel prices, too posted an annual growth of 3.3% in October, again the lowest in the current series.
A steep rise in vegetable prices is the biggest reason for the sharp spike in food inflation. Vegetable price inflation in urban areas was 35.4% (over the same period a year ago); it was 21% in rural areas in October. Overall vegetable price inflation was 26.1%, the highest since February 2018. Price of pulses too increased at 11.7%, the highest since January 2016. A seasonal shock to vegetable supplies, such as that of onions because of untimely rains, is the main reason for the sharp rise in vegetable prices.
To be sure, inflation has been inching up steadily this year. Retail inflation growth was 2% in January this year and it has increased every month except in July to reach 4.6% in October. However, the current phase of rise in inflation has been characterised by a peculiar trend of falling core inflation and rising food inflation unlike the earlier period, when core inflation continued to remain sticky even as food prices were falling.
A fall in core inflation, when seen along with other high frequency economic indicators in the non-farm economy suggests weak demand conditions, analysts said. Industrial production, as measured by the Index of Industrial Production has contracted in both August and September this year. The Nikkei Purchasing Managers Index (PMI) for service sector fell below 50 in the months of September and October. A value below 50 signifies contraction in economic activity in this index. PMI for industry was 50.6 in October, the lowest since November 2017. Composite PMI for both industry and services was below 50 in September and October. Various rating agencies have further downgraded their growth forecasts for the Indian economy after the IIP numbers were released this week. Japanese brokerage firm Nomura cut its fiscal year growth forecast for the Indian economy in 2019-2020 from 5.7% to 4.9%.
{{/usCountry}}A fall in core inflation, when seen along with other high frequency economic indicators in the non-farm economy suggests weak demand conditions, analysts said. Industrial production, as measured by the Index of Industrial Production has contracted in both August and September this year. The Nikkei Purchasing Managers Index (PMI) for service sector fell below 50 in the months of September and October. A value below 50 signifies contraction in economic activity in this index. PMI for industry was 50.6 in October, the lowest since November 2017. Composite PMI for both industry and services was below 50 in September and October. Various rating agencies have further downgraded their growth forecasts for the Indian economy after the IIP numbers were released this week. Japanese brokerage firm Nomura cut its fiscal year growth forecast for the Indian economy in 2019-2020 from 5.7% to 4.9%.
{{/usCountry}}The latest inflation numbers are likely to complicate matters when RBI’s Monetary Policy Committee (MPC) meets in the first week of December. Under India’s inflation targeting framework RBI is obliged to keep inflation at 4% with a range of two percentage points on either end. The central bank uses policy rates, the interest rate at which it lends money to other banks, to achieve this objective. RBI has cut the policy rate in five consecutive bimonthly policy meetings to pump-prime the Indian economy. However, this has not helped as growth rates have continued to slide. With headline inflation above the 4% mark, it’ll be interesting to see whether RBI continues its monetary easing stance, analysts said.
“The sharp spike in inflation, which is driven solely by food price increase, highlights the growing crisis in the economy. With non-farm sectors in a protracted slowdown, rise in food prices will hurt aggregate demand even more” said Himanshu, an associate professor of economics at Jawaharlal Nehru University. “This also raises questions on the validity of sticking to the inflation targeting framework, as policy rates can hardly influence food prices,” he added.
“We expect a December rate cut, but beyond that, it will be close decision (as inflation prints beyond October will remain elevated). Thus, it will be better if the rate cut is front-loaded in December”, said a research note from Soumya Kanti Ghosh, chief economist at the State Bank of India.