Inflation sees steepest rise since 2014 on higher vegetable prices; what will RBI do now?

By: |
Updated: January 13, 2020 6:32:55 PM

Retail inflation rose sharply to 7.35 per cent in December 2019 from 5.54 per cent in November owing to higher vegetable prices, the government data released on Monday showed.

inflation, consumer confidence, stagflation, inflation, cpi, wpi, price rise, price fall, disflation, deflationThe RBI expects the food inflation to remain high in the next six months.

Retail inflation rose sharply to 7.35 per cent in December 2019 from 5.54 per cent in November owing to higher vegetable prices, the government data released on Monday showed. The vegetable inflation in December recorded at 60.5 per cent pushed up the inflation at the highest level since 2014. The retail inflation based on Consumer Price Index (CPI) was 2.11 per cent in December 2018. The food inflation rose to 14.12 per cent in December as against (-) 2.65 per cent in the same month of 2018, the CSO data showed. The central government has mandated the Reserve Bank of India to keep inflation in the range of 4 per cent with a margin of 2 per cent on the either side. In its December policy review, the RBI had kept policy rates unchanged for the first time this year. The RBI expects the food inflation to remain high in the next six months. The inflation projection was also revised from 3.5-3.7 per cent in the second half of 2019-20 to 4.7-5.1 per cent.

Watch: What is inflation?

The housing inflation was recorded at 4.30 per cent vs 4.49 per cent (MoM); cereals inflation at 4.36 per cent vs 3.71 per cent (MoM); clothing & footwear inflation at 1.50 per cent vs 1.30 per cent (MoM); pulses inflation at 15.44 per cent vs 13.94 per cent (MoM) and December core inflation at 3.7 per cent. “While the RBI may not a hike the policy rates in the immediate future, it may not be able to cut the rates either. While the circumstances around likely fiscal slippages may have an adverse impact on interest rates, the inflation level would add to these worries in the immediate term,” said Joseph Thomas, Head of Research, Emkay Wealth Management.

“The concerns surrounding a higher core inflation trajectory are likely to be adequate for the MPC to remain on hold in its February 2020 policy review, along with a possible change in stance from accommodative to neutral. With an extended pause likely from the MPC over its next few meetings, the magnitude of further Twist OMOs and the market’s expectations of the fiscal picture to be revealed in the upcoming Union Budget, will dominate the trend in bond yields in the rest of this month,” Aditi Nayar, Principal Economist, ICRA said.

Also read: India may create this many fewer jobs this fiscal; SBI report tells key reason

“At 14.1%, food inflation certainly is worrying. Almost all sub-items posted higher than expected inflation (with an exception of fruits). Even if ‘vegetable prices’ decline 5% MoM over the next two months, headline inflation will stay at 7%. What worries us is that headline inflation is likely to stay above 5% in CY2020, which confirms that rate cuts are a thing of past now,” Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services said. Meanwhile, the economy is seeing a slowdown for the past few months on account of both global and domestic factors. The economy grew at a dismal 4.5 per cent in the second quarter of the ongoing fiscal, largely on account of weak consumption.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Next Stories
1Raghuram Rajan on jobs: Growth rate not sufficient to generate employment; here’s what Modi must do
2Modi’s village broadband plans facing delays; will private players help fulfill the goal?
3Rising oil prices looming on economy as inflation set to breach 6% limit