Inflation spike transitory, expect it to drop to 4-4.5% by July, says CEA K Subramanian

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Updated: February 14, 2020 7:55:01 AM

Explaining the role of base impact, Subramanian said CPI inflation in vegetables spiked to 50.2% in January from -13.4% a year before. Similarly, inflation in pulses rose from -5.5% to 16.7%, food and beverages from -1.3% to 11.8% and overall food inflation from -2.2% to 13.6%. The headline inflation nudged up to 7.6% in January from just 2% a year earlier.

Subramanian expected retail inflation to come down to a more realistic level of 4-4.5% by July

A surge in onion prices contributed around 70 basis points to retail inflation that scaled a 68-month peak of 7.59% in January, chief economic adviser Krishnamurthy Subramanian said on Thursday, stressing that the latest spike in inflation is “transitory” and is substantially driven by volatile vegetable prices and an unfavourable base. He also pointed at a healthy co-relation of 0.53 between the Purchasing Managers’ Index (PMI) and the Index of Industrial Production (IIP), based on data for over seven years, and indicated that the surge in the PMI index in January would augur well for factory output growth. The PMI for manufacturing scaled a near eight-year peak in January and that of services jumped to a seven-year high. The IIP, however, shrank 0.3% y-o-y in December 2019, having reversed a modest rise in the previous month and recording its fourth contraction in five months.

Subramanian expected retail inflation to come down to a more realistic level of 4-4.5% by July, as the effect of an inconducive base wanes. Fresh arrivals of crops, especially onion, in March and higher vegetable output will have a soothing effect on inflation in the coming months. Core inflation, meanwhile, stood at 4.2% in January, against 5.4% a year before, reflecting a certain degree of demand compression in the economy, Subramanian said. This means the underlying inflationary pressure in the economy isn’t really a matter of grave concern yet.

Explaining the role of base impact, Subramanian said CPI inflation in vegetables spiked to 50.2% in January from -13.4% a year before. Similarly, inflation in pulses rose from -5.5% to 16.7%, food and beverages from -1.3% to 11.8% and overall food inflation from -2.2% to 13.6%. The headline inflation nudged up to 7.6% in January from just 2% a year earlier.

This is probably why the monetary policy committee, in its review meeting earlier this month, decided to keep the repo rate unchanged but still delivered implicit easing, to address concerns about a protracted growth slowdown. The RBI said it would lend `1 lakh crore of one-year and three-year money to banks at the repo rate 5.15% so they would have durable funds at a softer rate. The central bank also gave them a six-month CRR-break on new home, auto and MSME loans, again bringing down their cost of funds. Economic growth is expected to hit a seven-year low of 5.7% in FY20 and the Economic Survey expects growth to pick up to 6-6.5% in the next fiscal.

The central bank has also projected food inflation to moderate with higher arrival of crops. Crude prices are expected to remain volatile, with greater downside risk. It has forecast headline retail inflation to drop to 6.5% in the last quarter of this fiscal and remain in the range of 5-5.4% in the first half of FY21. In the third quarter of the next fiscal, inflation is expected to drop substantially to around 3.2%.

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