Food prices pushed CPI higher in India – UOB
|UOB Group’s Economist B.Gan reviewed the recent higher-than-expected inflation figures in India.
Key Quotes
“India’s inflation rose past the Reserve Bank of India’s (RBI) medium-term target of 4.0% for the first time since July 2018, and at its fastest pace in 16 months… Core inflation, which strips away energy and food items, however decelerated further to 3.5% y/y in the same month, the slowest since the present series started in April 2015”.
“The uptick in headline inflation was chiefly driven by the surge in food prices, which rose to its fastest pace in over three years at 7.9% y/y in October 2019. Food and beverage prices, which accounts for almost half of the CPI basket, rose 6.9% y/y in the same month”.
“The higher inflation print in October was likely driven by supply-driven factors rather than an improvement in consumer demand. Specifically, monsoon conditions have led to lower rainfall and poor harvest in recent months, thus significantly lifting food prices. Moreover, food prices are also recovering from the price collapse in 2018, where prices contracted for five straight months between October 2018 and February 2019. Contrarily, consumption demand in India is expected to remain low given the accelerating unemployment levels (8.5% in October, highest since August 2016) amid a softening manufacturing sector and relatively pallid economic outlook”.
“As such, we opine that the rise in inflation pressures is not fuelled by the recent rate cuts by the central bank. This is given the fact that monetary policy is proven by be more effective in influencing demand behavior, rather than supply conditions. With economic growth likely to stay soft in the coming quarter amid limited fiscal policy space to-date, we continue to expect RBI to cut rates further by another 25 basis points in its December MPC meeting. Should that come to pass, this will bring the repurchase and reverse repurchase rate to 4.90% and 4.65%, respectively”.
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