Retail inflation accelerated to a three-month high of 4.91% in November, despite a conducive base and fuel tax cut, as core inflation remained sticky and price pressure in food returned.
The rise in inflation remained almost broad-based and suggests producers might have passed on the spurt in input costs to consumers across a broad range of goods and services, amid persisting supply-side challenges. Still, given retail inflation remained within the Reserve Bank of India’s target band (2-6%) for a fifth straight month, the monetary policy committee will likely continue with its growth push, analysts reckon.
Easing price pressure in fuel & light, pan, tobacco and intoxicants, and miscellaneous items was more than offset by a rise in inflation in food and beverages, housing, and clothing and footwear.
External headwinds continue to pose risks. The global commodity prices remain elevated (of course, oil prices have somewhat eased) and the US Federal Reserve has started tapering its asset purchases.
Inflation in food products, which make up for about a half of the inflation basket, rose to 1.87% in November from 0.85% in October, despite favourable base effect. Importantly, core inflation remained elevated at 5.9% in November, against 5.8% in the previous month, according to Icra.
In its statement earlier this month, the monetary policy committee acknowledged that “cost-push pressures from high industrial raw material prices, transportation costs, and global logistics and supply chain bottlenecks continue to impinge on core inflation”. Of course, the slack in the economy is muting the pass-through of rising input costs to output prices. It forecast CPI inflation at 5.3% for 2021-22; 5.1% in the third quarter and 5.7% in the last quarter, with risks broadly balanced.
However, the MPC expected easing price pressure in vegetables, as supply improves with winter arrivals. Rabi sowing, too, is progressing well; the government has already cut import duties on edible oil; crude oil prices have witnessed correction as well, it said.
Meanwhile, fuel and light inflation moderated to 13.35%, against 14.35% in the wake of the tax cut by the Centre and most states.
On a month-on-month basis, the second-round effects of fuel tax reduction weighed down transport and communications sub-index by 60 basis points in November. But other categories of miscellaneous items showed a hefty rise in month-on-month terms, ranging from 0.2% (for education) to 0.9% (for personal care and effects), underscoring the growing price pressures in the economy, according to Icra chief economist Aditi Nayar.
“In our assessment, as long as the CPI inflation remains within the target of 2-6%, the MPC and RBI will prefer to prioritise growth, and maintain policy support to impart durability and sustainability to the recovery,” she said.
DK Pant, chief economist at India Ratings, said inflationary pressure in commodities such as health, fuel & light, and transport and communications has turned structural. “Supply shortages are further aiding to higher inflation, which cannot be termed as transitory,” he said. Pant expected retail inflation to remain elevated until January 2022 before easing subsequently.
“Although it should call for narrowing the policy corridor, however, headline deficit, borrowing and arithmetic behind these numbers will be major guiding force behind February 2022 MPC meeting,” Pant said.