Inflation outlook: Status quo from RBI on Omicron uncertainty

Source: Financial Express, 03 December 2021

As base effect wanes, inflation to harden to an uncomfortable 5.5-6% in December-March FY22, close to upper end of MPC’s medium-term target range. With elevated input prices, either margins will be further squeezed or higher prices will contain the consumption recovery in H2FY22.

The Monetary Policy Committee (MPC) meets next week amidst renewed uncertainty generated by the Omicron variant of Covid-19. When it had last met, in October 2021, it had remarked that with output trailing the pre-pandemic level, recovery remains uneven and dependent upon continued policy support. With the Q2FY22 GDP marginally exceeding the pre-Covid-19 level, will the MPC conclude that economic recovery is broad-based and durable enough, and policy support can be weaned off? Unlikely, in our view.

To recap, the October policy review had contained no major surprises. The MPC had voted unanimously to maintain the policy repo rate at 4%. In a split vote, it had indicated a continuation of the accommodative stance for as long as necessary to revive and sustain growth and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward. The MPC had retained its FY22 growth forecast at 9.5%, pegging the Q2FY22 expansion at 7.9%, while reducing its inflation forecast for this fiscal by 40 bps to 5.3%. As expected, RBI had simultaneously refrained from hiking the reverse repo rate, while continuing the move towards liquidity normalisation.

The recent macroeconomic developments are decidedly mixed, both on the inflation and growth front. Encouragingly, the CPI inflation dropped from 5.3% in August 2021 to 4.3% in September 2021, before rising mildly to 4.5% in October 2021. The Centre announced a welcome excise cut on petrol and diesel, which was followed by VAT reduction on these by several states. The softening impact of this is expected to be visible in the non-core CPI inflation for November 2021.

Additionally, the outlook for the rabi crops is bright, softening the expected food inflation trajectory. Benefiting from healthy moisture levels, the area sown under rabi crops recorded a healthy year-on-year (y-o-y) increase of 7.3% as on November 26, 2021. This was led by higher acreage under some high inflation items such as oilseeds as well as pulses and wheat, partially offset by lower area sown under rice and coarse cereals.

However, vegetable prices have surged. Moreover, producers grappling with cost pressures emanating from surging global commodity prices and logistics costs have announced price increases in a number of sectors, which is likely to keep core inflation elevated.

On balance, we expect the CPI inflation to print at around 4.7% in November 2021. As the base effect wanes, we anticipate that it will harden to an uncomfortable 5.5-6% in December-March FY22, edging close to the upper end of the MPC’s medium term target range of 2-6%. Overall, the CPI inflation is now expected to average 5.5% in FY22, 20 bps higher than the forecast of 5.3% made by the MPC in its October 2021 review.

Signals regarding the momentum of economic growth are also mixed. India’s real GDP expanded by 8.4% in y-o-y terms in Q2FY22, surpassing the MPC’s and our own forecast of 7.9%. With this, the absolute level of GDP reverted mildly above the pre-pandemic level of Q2FY20, one of the metrics being watched by the MPC. However, we contend that broad-based signs of a durable recovery were missing in the disaggregated GDP data.

Encouragingly, gross fixed capital formation displayed a rise of 1.5% in Q2FY22 relative to Q2FY20, echoing the trend in capital goods output and government capital spending. However, private and government consumption expenditure in Q2FY22 lagged their pre-Covid-19 level by 4% and 17%, respectively. The impact of this was offset by a surge in valuables relative to the pre-Covid-19 level of Q2FY20, led by the near tripling in imports of gold and silver.

At constant 2011-12 prices, the valuables in Q2FY22 exceeded the Q2FY20 level by Rs 0.8 trillion, much higher than the mild absolute rise of Rs 0.1 trillion in GDP during this time period. This is the chief reason why we are circumspect, despite the Q2FY22 GDP exceeding our forecast.

Moreover, some key sub-sectors such as manufacturing, mining and construction displayed a lower GVA growth in Q2FY22 than the volume expansion indicated by the IIP, suggesting that rising input costs bit into corporate margins. Looking ahead, rising domestic vaccine coverage and fuel tax cuts will boost confidence and reinvigorate demand, pushing up volumes. However, with elevated input prices, either margins will be further squeezed, or higher prices will contain the consumption recovery in H2FY22.

After a broadly healthy festive season, some indicators have displayed a flagging momentum in November 2021. For instance, the daily average generation of GST e-way bills declined considerably to 2 million in November 1-28, 2021, from the record-high 2.4 million seen in October 2021. Electricity growth dipped in November 2021 to a feeble 2%. Moreover, vehicle registrations contracted on a y-o-y basis. On the other hand, the November PMI rose further, mirroring the improved mobility data.

Following improved tax revenue visibility, we anticipate a brisk pace of central and state government spending in H2FY22, even as the base effect is particularly unfavourable in Q4FY22. Moreover, the recent releases of the remaining tranches of the back-to-back GST compensation loan as well as an extra instalment of central tax devolution would boost the cash flows of the state governments, nudging them to step up their spending. This is growth-positive, as state expenditure is an important component of brightening business sentiment and economic activity.

Disappointingly, the discovery of the Omicron variant has reignited uncertainty regarding the strength of global demand and cross-border flows, as well as the insurance provided by the current Covid-19 vaccines, while at the same time triggering some correction in commodity prices.

In light of the renewed uncertainty, we expect a status quo from the MPC and RBI in the December 2021 policy review on the stance and rates. However, the tone may shift to signal an impending change in the monetary policy stance to neutral in the February 2022 policy review, as long as Omicron doesn’t necessitate fresh lockdowns in the coming weeks. We expect the stance change to be accompanied by a 15 bps hike in the reverse repo rate by RBI in February 2022, narrowing the policy corridor to 50 bps from the current 65 bps.

Thereafter, our base case continues to pencil in hikes of 25 bps each in the repo and reverse repo rates each in the April 2022 and June 2022 reviews, followed by a reassessment of the durability of the growth revival as policy support is withdrawn.

RBI remains laser-focused to bring back inflation to 4 pc: Guv Das

Source: Financial Express, 22 October 2021

“A pattern of policy making in slow motion that is guided by an excessive desire to avoid surprises is no longer appropriate,” said Varma, who voted against the accommodative stance.

The Reserve Bank remains laser-focused to bring back retail inflation to 4 per cent over a period of time in a non-disruptive manner, Governor Shaktikanta Das stressed while voting for status quo in interest rates, as per minutes of the October policy meeting released on Friday.

The central bank has been mandated by the government to ensure the Consumer Price Index (CPI) based inflation is at 4 per cent, with a band of 2 per cent on either side. The retail inflation, which was above 6 per cent during May and June, has started moving down and stood at 4.35 per cent in September.

As per the minutes of the Monetary Policy Committee (MPC) meeting held during October 6 to 8, Das said in its August 2021 meeting, the panel was faced with the challenges posed by headline inflation exceeding the upper tolerance threshold for the second successive month.

The actual inflation outcomes for July-August, with inflation registering a substantial moderation to move within the tolerance band, have vindicated the MPC’s outlook and monetary policy stance, he noted.

The more-than-expected softening of inflation in July and August this year was underpinned by the significant lowering in food price momentum, especially in August.

Going forward, the governor said if there are no spells of unseasonal rains, food inflation is likely to register significant moderation in the immediate term, aided by record kharif production, more than adequate food stocks, supply-side measures and favourable base effects.

“Volatile crude oil prices, particularly the resurgence since mid-September, is pushing pump prices to new highs, raising risk of further spillover of high transportation cost into retail prices of goods and services,” he said.

He opined that continued monetary support is necessary as the economic recovery process even now is delicately poised and growth is yet to take firmer roots.
At this critical juncture, “our actions have to be gradual, calibrated, well timed and well-telegraphed to avoid any undue surprises”, he asserted.

While voting to keep the policy rate unchanged and continue with the accommodative stance, Das said, “In parallel, we remain laser-focused to bring back the CPI inflation to 4 per cent over a period of time in a non-disruptive manner.” All members of the MPC — Shashanka Bhide, Ashima Goyal, Jayanth R Varma, Mridul K Saggar, Michael Debabrata Patra and Shaktikanta Das — unanimously voted to keep the policy repo rate unchanged at 4 per cent. Also, all members, except Varma, voted to continue with the accommodative stance.

Deputy Governor Patra said while the trajectory of inflation may undershoot the projections made in August, it is likely to be uneven, sluggish and prone to interruptions.

He also opined that even as domestic macroeconomic configurations are improving, the risks from global developments are rising and warrant a close watch as they could stifle the recovery that is underway in India.

Exports are directly at risk from logistics bottlenecks, shortages of containers and personnel in international shipping, and elevated freight rates. Policy interventions, including coordinated multilateral efforts, are needed urgently to prevent global trade from choking, he opined.

“In my view, the biggest risks to India’s macroeconomic prospects are global and they could materialise suddenly,” he added.

RBI Executive Director Saggar stressed that “an Arjuna’s eye” needs to be kept on commodity prices and “we need to consider different scenarios according to which we can calibrate our policies.” He said that in his assessment, the probability that oil prices may touch or cross USD 85 per barrel before the year ends and could average USD 80 or more in second half is not insignificant.

“It can have significant impacts that are hard to precisely quantify due to non-linearities and uncertainties but, on a ballpark from the baseline, can be expected to raise inflation by 15-20 bps, lower growth by 13-15 bps, have negligible effects on fiscal subsidies and widen CAD by about 0.25 per cent of GDP,” he added.

Varma, the external member on the panel, said several arguments he made in his August MPC meeting continue to be valid.

“Since August, I have become increasingly concerned about two other risks that have become salient globally in recent weeks,” he said.

The first is that the ongoing transition to green energy worldwide poses a significant risk of creating a series of energy price shocks similar to that in the 1970s. The second recent concern is about the tail risk to global growth posed by emerging financial sector fragility in China, he said.

“Both of these risks — one to inflation and the other to growth — are well beyond the control of the MPC, but they warrant a heightened degree of flexibility and agility.

“A pattern of policy making in slow motion that is guided by an excessive desire to avoid surprises is no longer appropriate,” said Varma, who voted against the accommodative stance.

External member on the MPC Ashima Goyal said global price shocks have turned out to be more persistent, contributing to sticky core inflation and tax cuts on petroleum products are “essential” to break the upward movement that could impart persistence to domestic inflation.

She also said there is large uncertainty built into current prices because of the speculative element that seeks to profit from aggravated shortages.
“Large sudden falls are therefore possible,” she said, and added oil prices have shown high volatility.

She further said the “climate change activism” that is partly responsible for current spikes will also reduce oil demand in the future.

The third external member on the MPC, Shashanka Bhide said investment activity has picked up over the levels seen 2020-21 but is yet to reach the 2019-20 levels.
Accelerated progress in vaccinations and a number of economic policy initiatives to open up opportunities for investment are among the factors constituting positive stimulus to fresh investments.

Three members on the MPC are RBI officials and the government appoints three eminent economists as external members on the panel.

RBI cuts FY22 inflation forecast to 5.3%

Source: Economic Times, 08 October 2021

The Reserve Bank of India on Friday cut the FY22 inflation forecast to 5.3% from its earlier estimate of 5.7%. Edible oils, fuel, LPG, and medicine prices are driving inflation rate, Governor Shaktikanta Das said while announcing the monetary policy. Though Das cautioned that unseasonable rains and adverse weather events could pose risks to vegetable prices.

As per the central bank’s estimates, CPI inflation is seen at 5.1% in Q2, 4.5% in Q3 and 5.8% in Q4 of FY22 with risks broadly balanced. CPI inflation for forst quarter of fiscal 2023 is projected at 5.2%. Das added that CPI inflation during July-August had turned out to be lower than anticipated. CPI inflation print in August came in at 5.3%, the second consecutive month of moderation. Though, core inflation, i.e. inflation excluding food and fuel, remained elevated and sticky at 5.8% in July-August 2021.

“The CPI headline momentum is moderating with the easing of food prices which, combined with favourable base effects, could bring about a substantial softening in inflation in the near-term,” Das said.

Though Das cautioned that the resurgence of edible oils prices and high global crude oil prices in the recent period, is a cause of concern.
“Pressures persist from crude oil prices which remain volatile over uncertainties on the global supply and demand conditions,” Das said. “Domestic pump prices remain at very high levels. Rising metals and energy prices, acute shortage of key industrial components and high logistics costs are adding to input cost pressures.”

The RBI Governor also noted that the decline in vegetable and cereal prices with sharp deceleration in gold prices, had helped softening of inflation. Going forward as per RBIs estimates, cereal prices are expected to remain soft though unseasonable rains and adverse weather events pose upside risks to vegetable prices.

“Going forward, the inflation trajectory is set to edge down during Q3:2021-22, drawing comfort from the recent catch-up in kharif sowing and likely record production,” Governor Das said. “Along with adequate buffer stock of food grains, these factors should help to keep cereal prices range bound. Vegetable prices, a major source of inflation volatility, have remained contained in the year so far and are likely to remain soft, assuming no disruption due to unseasonal rains.”

India’s inflation “uncomfortably high”: Moody’s Analytics

Source:, Mar 30, 2021

India’s inflation is at an “uncomfortably high” level, which is an exception among Asian economies, Moody’s Analytics said on Tuesday.

Higher fuel prices will keep upward pressure on retail inflation and keep the RBI from offering further rate cuts, said Moody’s Analytics, a financial intelligence company.

Retail inflation rose to 5 per cent in February, from 4.1 per cent in January. The Reserve Bank mainly takes into account retail inflation while deciding on the monetary policy.

Core inflation (which excludes food, fuel and light) was up 5.6 per cent in February, from 5.3 per cent in January, Moody’s Analytics said, adding India’s inflation is “uncomfortably high”.

In its macro roundup, Moody’s Analytics said inflation is subdued in most of Asia, and expected to only gradually pick up over 2021 because of rising oil prices and economies starting to reopen. Brent crude has climbed 26 per cent this year at around USD 64 per barrel. It was around USD 30 per barrel in March 2020, when the COVID-19 crisis was near its peak.

“India and the Philippines are exceptions. In these economies, inflation is above comfort levels, adding to the list of challenges for policymakers,” it said.

Stating that India’s inflation is “worrisome”, it said volatile food prices and rising oil prices led retail inflation to exceed the upper band of 6 per cent several times in 2020, inhibiting the RBI’s ability to keep accommodative monetary settings in place during the height of the pandemic.

Under the monetary policy framework, RBI has a target for maintaining retail inflation at 4 per cent (+/- 2 per cent).

” RBI is expected to retain its current inflation-targeting band beyond its current expiry date of March 31,” Moody’s Analytics added.

WPI inflation rises to 4.17% in February on costlier food, fuel, power

Source: Business Standard, Mar 15, 2021

New Delhi: The wholesale price-based inflation rose for the second consecutive month in February to 4.17 per cent, as food, fuel and power prices spiked.

The WPI inflation was 2.03 per cent in January and 2.26 per cent in February last year.

After witnessing months of softening of prices, the food articles in February saw 1.36 per cent inflation. In January it was (-) 2.80 per cent.

In vegetables the rate of price rise was (-) 2.90 per cent in February, against (-) 20.82 per cent in January.

Inflation in pulses was 10.25 per cent in February, while it fruits it was 9.48 per cent, and in fuel and power basket it was 0.58 per cent.

The RBI in its monetary policy last month kept interest rates unchanged for the fourth consecutive meeting and said that the near-term inflation outlook has turned favourable. Retail inflation, based on the consumer price index, was at 5.03 per cent in February, data released last week showed.

Retail inflation jumps to 3-month high of 5.03% amid rise in fuel prices

Source: Business Standard, Mar 13, 2021

New Delhi: India’s retail inflation surged to a three-month high of 5.03 per cent in February, as against 4.06 per cent in the previous month, as petrol and diesel prices rose sharply.

This may lead to the demand for fuel tax cuts growing louder in the coming days. Food inflation rose to 3.87 per cent from 3.11 per cent over this period.

While the consumer price index-based fuel and light inflation rate stood at 3.53 per cent in the month compared to 3.82 per cent in January, the devil lies in detail. Within the category, petrol saw the inflation rate surging to 20.57 per cent in February compared to 12.53 per cent in January. Diesel, on the other hand, saw the rate of price rise climbing to 22.50 per cent from 12.79 per cent. Diesel inflation had an impact on other segments as well.

The overall fuel and light inflation rate came down due to other segments such as electricity, which saw its inflation rate coming down to 3.29 per cent in February from 3.60 per cent in January.

Sunil Kumar Sinha, principal economist at India Ratings, said the higher retail prices of fuel due to a combination of higher crude prices and elevated excise duties pushed transport and communication inflation to a four-month high of 11.4 per cent in February from 9.4 per cent in January.

There are chances of food items, which have about 47 per cent weighting in the consumer price index, facing the indirect impact of high diesel prices.

Govinda Rao, former director at the National Institute of Public Finance and Policy (NIPFP) and now chief economic adviser at Brickwork Ratings, said, “Going forward, the excess liquidity in the system, combined with the volatility in fuel prices, can pose an upward risk to inflation.”

If one takes out food and fuel, what is left is core inflation, which is often taken as a key part of the overall rate of price rise. This inflation rate was up at a three-month high of 5.86 per cent.

Rao said, “In this situation, the MPC (monetary policy committee) is expected to continue the pause, though the RBI might take some measures to drain excess liquidity.”

The MPC is scheduled to meet in the first week of next month.

In its February review, the MPC had suggested that the Union and state governments reduce taxes on petroleum products to provide some relief to customers, who are paying record high prices for petrol and diesel.

“Pump prices of petrol and diesel have reached historic highs. An unwinding of taxes on petroleum products by both the Centre and states could ease the cost-push pressures,” the MPC had said.

Finance Minister Nirmala Sitharaman had said the issue of tax burden on petroleum products was something that the Centre and states had to discuss as both drew revenue from these items.

The Centre imposes both flat and ad valorem rates on fuel. For instance, there is a 2.5 per cent Customs duty on unbranded petrol. Along with this, on every litre, there is a Rs 14.90 countervailing duty, Rs 18 additional Customs duty, Rs 1.40 basic excise duty, Rs 11 special additional excise duty, and Rs 2.5 of newly imposed cess. However, there is no uniformity of taxes among states. Inflation in the services sector too saw a rising pressure. For instance, the health inflation rate in February stood at a 17-month high of 6.3 per cent. “This is turning structural,” Sinha said.

Input inflation, muted demand drags on earnings growth

Source: Financial Express, Feb 23, 2021

The reasonably good results for the December 2020 earnings season and the recovery in the coming quarters notwithstanding, profit estimates for FY22 remain below pre-Covid levels. Indeed, while the economy is recovering fast, large pockets remain fragile.

While earnings for FY22 will benefit from the low base of FY21, just as the FY21 numbers have benefited from the low base of FY20, there are a couple of headwinds.

The first is the rising prices of commodities—especially crude oil—and it is not certain all businesses will be able to pass on the higher input costs. The muted sales of two-wheelers are evidence they have become unaffordable for many after the price increases.

The second concern is that the demand for a host of consumer goods could peter out once the demand from the more affluent households has been satiated; analysts point out the lockdowns necessitated purchases of homes and also a range of goods.

While the sales of affordable homes could well retain momentum, whether this holds for more expensive residential properties remains to be seen.

Large numbers of urban households—and thousands of small enterprises—have been badly impacted by the pandemic and this would affect consumption, at least in the near term. Again, profitability has been boosted by hefty cost cuts and not all of it would be a permanent saving. For instance, salaries would be restored and increments re-started as the business picks up. However, apart from IT and BFSI companies, wage bills are flat or shrinking.

The corporate results suggest the larger companies, especially market leaders and bigger brands have made strong comeback, partly on the back of market share gains from the unorganised sector. This is reflected in the robust GST collections over the past few months.

But the anaemic credit growth—with loan growth slipping to sub-6% in the fortnight to January 29 and CP issuances in January down 26% lower y-o-y —is a sign that a large swathe of companies is not stepping up production. Kotak Institutional expects net profits of the Nifty-50 Index to grow 20% in FY2021 and 25% in FY2022. The increase would be led by volume recoveries in the auto and oil& gas sectors, lower provisions in banks and higher ARPUs in telecom. Given the elevated valuations, strategists expect the markets confidence about the country’s medium term growth prospects would be crucial. “We note that India’s GDP growth had started to decelerate meaningfully even before the Covid-19 pandemic outbreak on decline in the investment component of GDP,” they observed.

India’s inflation target band up for review: FM Nirmala Sitharaman

Source: Business Standard, Feb 19, 2021

New Delhi: India’s inflation target band of 2-6 per cent is up for review as the five-year term for the Monetary Policy Committee’s (MPC’s) inflation-targeting framework draws to a close, Finance Minister Nirmala Sitharaman said on Thursday. “The MPC’s term is coming to an end. Inflation targeting will also have to be reviewed. We shall do that,” Sitharaman was quoted as saying by Reuters.

The government has asked the Reserve Bank of India (RBI) for its views on the targeting framework, said a senior government official. The government has also sought the central bank’s suggestion on tweaks to the CPI basket and if the old weightings need to be changed or recalibrated, said the official. The new framework would be announced by March 31, he added.

The framework, notified in 2016, mandates it to target 4 per cent consumer price index (CPI) inflation until March 31, 2021, with the upper and lower tolerance limits of 6 per cent and 2 per cent, respectively.

The RBI Act was amended to provide for the inflation target to be set by the central government, in consultation with the RBI, once every five years.

The current range of 2-6 per cent is valid till the end of this fiscal year. The CPI-based inflation rate did not come down below 6 per cent till November in the last calendar year, barring March.

According to the RBI Act, amended through the Finance Act, 2016, the central bank has to send a report to the government in the case of a breach in the mandate cited above, stating reasons for failure to achieve the target, remedial actions proposed to be taken by it, and an estimate of the period within which the inflation target will be achieved.

However, the MPC has not taken the April and May inflation numbers into consideration because these were imputed, escaping government scrutiny.

CPI inflation was back within the MPC’s range of 4 (+/-2) per cent since December 2020, and fell to a 16-month low of 4.06 per cent in January, after hovering above the upper limit of 6 per cent of the target since March 2020.

However, the government and the RBI are of the view that the current targeting framework has worked out well and the status quo must be maintained. After the recent monetary policy announcement, RBI Governor Shaktikanta Das said that inflation targeting had worked well.

“The experience with successfully maintaining price stability and the gains in credibility for monetary policy since the institution of the inflation targeting framework, barring the Covid-19 period, need to be reinforced in the coming years even as we exit the pandemic and seek to exploit the opportunities of the post-Covid world,” he had said.

Recently, Das had also said a wider band for targeting inflation would be meaningless because it would dilute its effectiveness in setting monetary policy.

In a working paper released by the RBI in December, authors Deputy Governor Michael Patra and Harendra Kumar Behera had also defended maintaining inflation target at 4 per cent in the medium term.

“If it ain’t broke, don’t fix it,” it had said.

The government has echoed this view, and has favoured maintaining the status quo for targeting inflation. In a recent interview with Business Standard, Prin­cipal Economic Adviser Sanjeev Sanyal had said the current system had worked reasonably well to bring down inflation.

“I don’t think there is any need to tinker with it too much. Also, it’s a reasonable range of 2-6 per cent and we have very rarely gone outside it,” he had said. The CPI basket can be updated, and the exercise is periodically done by the government and the RBI, Sanyal had said.

However, Madan Sabnavis, chief economist at CARE Ratings, said India conventionally had had high inflation, and the MPC’s inflation target should be increased to 5 (+/-2) per cent.

“Ever since the MPC was constituted, we have seen low CPI inflation, but historically, it has been above 5 per cent. Targeting 4 (+/-2) per cent is not reasonable,” Sabnavis said.

The MPC has deviated from the inflation target last year due to the pandemic, and the government should address the question whether growth should be targeted along with inflation, Sabnavis said. Another important argument, Sabnavis said, is whether CPI inflation was the better index to be targeted, given the fact that food prices were volatile.

The government must explore if WPI inflation can be made an anchor, he said. “If the WPI is chosen to be the right index, then the target cannot be 5 per cent,” he said. To exclude the impact of high, volatile food prices, the MPC can also be mandated to target core inflation, he said. Core inflation is calculated after taking out food and fuel items.

Wholesale inflation at 2%, no rate cuts seen

Source:, Feb 16, 2021

NEW DELHI: Inflation, measured by the wholesale price index (WPI), rose to 2% in January from the previous month’s 1.2% on the back of rising manufactured product prices. Economists said they do not see any interest rate cuts from the Reserve Bank of India for now, despite retail inflation showing signs of cooling.

Data released on Friday had shown retail inflation cooling to a 16-month low of 4.1% in January as some food and vegetable prices eased. Retail and the WPI inflation have shown signs of diverging.

The WPI numbers released by the commerce and industry ministry on Monday showed prices in the manufactured products category rose to an eightmonth high, which economists said was an encouraging sign as it displayed the return of pricing power for companies.

The food segment displayed sharp deflation and inflation in food articles contracted to a 26-month low of 2.8% in January. Prices of vegetables fell 20.8% for the second consecutive month. Inflation in onions fell for the third month by 32.6%, the data showed.

Inflation in primary articles, which accounts for 22.62% of WPI, registered the sharpest decline in 43 months, according to a note by Care Ratings.

Wholesale prices is likely to register an up-tick in the coming months, with sustained surge in manufacturing. Core inflation (minus food and fuel) rose to a 27-month high of 5.1% in January and experts said the strengthening of pricing power could push it to 7-7.5% range in the first quarter of fiscal year 2022.

Retail inflation at 16-month low in Jan

Source: The Hindu Business Line, Feb 12, 2021

New Delhi: With a dip in vegetable and sugar prices, retail inflation skid to 16-month-low of nearly 4 per cent in January. Though this seems to be a comfortable zone for the Reserve Bank of India, it might not prompt immediate downward revision of policy interest rate.

Meanwhile, industrial growth is back in black in December.


Retail inflation, based on Consumer Price Index (CPI), continued to slide in January and has now touched 4.06 per cent. This is the lowest after 4.62 per cent in October 2019. The headline rate for January is near median rate of targeted inflation range of 4 per cent with 2 per cent in both directions.

However, this is unlikely to prompt the RBI Governor-led Monetary Policy Committee to lower the policy rate, better knows as Repo Rate (the rate at which the RBI lends money to Scheduled Commercial Banks for a short period). One key factor could be continuous increase in fuel prices and that will also have a multiplier. Also, the RBI would like to wait for some more time to see the trend not just in headline but also in core inflation (excluding price movement in volatile products such as food and fuel). The next meeting of the MPC is likely to take place in April.

Food inflation, based on Consumer Food Price Index (CFPI), declined to 1.89 per cent in January against 3.41 per cent in December. Retail inflation for vegetables in January was negative 15.84 per cent while for sugar and confectionary it was negative at 0.26 per cent. Bird flu also appears to have affected the rate of inflation for eggs as it is now around 13 per cent against 20 per cent or more in the previous months.

However, the bad news is that inflation for non-foods has recorded a rise, which is why Aditi Nayar, Principal Economist with ICRA, expects inflation to resume an uptrend in February-March 2021. “We do not think that today’s softer-than-anticipated print creates the room for an imminent rate cut,” she said. Further, she mentioned that food prices have displayed a mixed trend so far in February. The rise in onion prices, as well as higher crude oil prices and their transmission into retail fuel prices, are areas of concern that need to be monitored.

“If the pace of growth in Q4 FY21 exceeds the prevailing tepid expectations, the stance may be revised to neutral in June 2021 MPC review. However, we anticipate that the MPC will err on the side of caution, and change the stance of monetary policy to neutral in the August 2021 review or later, only after there is greater confidence related to the economic revival,” she said.


Improved manufacturing and continuous rise in electricity production helped industrial growth, based on Index of Industrial Production (IIP), and will be back in positive territory as December saw a growth of 1 per cent against over 2 per cent contraction in November. Manufacturing, with weight of over 77 per cent in IIP, recorded growth of 1.6 per cent in December, while electricity saw a growth of 5.1 per cent.