LIMITING ROOM for the RBI to cut policy rates any further, retail inflation rose sharply to a five-and-a-half year high of 7.35 per cent in December 2019, surpassing the central bank’s comfort range, primarily on account of rising vegetable and food prices. Food items make up almost 46 per cent of the retail inflation basket.
The key reasons driving Consumer Price Index (CPI)-based inflation were vegetable inflation surging past a six-year high, and inflation in the pulses segment rising to an over three-year high. Increase in transport and communication charges added to inflationary pressures.
According to data released by the National Statistical Office (NSO) Monday, vegetable items recorded the highest inflation rate at 60.5 per cent in December 2019, followed by pulses and products at 15.44 per cent, meat and fish at 9.57 per cent and egg at 8.79 per cent, among others.
The overall CPI-based retail inflation was 2.11 per cent in December 2018 and 5.54 per cent in November 2019.
The latest data showed that urban CPI inflation rose to a six-year high of 7.5 per cent in December 2019 compared with 5.8 per cent in the previous month, while rural CPI inflation crossed a five-year high at 7.3 per cent.
The core CPI inflation — inflation excluding food and oil products — rose 3.75 per cent in December 2019 compared with 3.5 per cent in November 2019. The cumulative CPI inflation increased to 4.13 per cent in April-December 2019-20 compared with 3.73 per cent in April-December 2018-19.
Retail inflation had started inching up since the beginning of 2019, but was negative till February 2019 and in low single-digit till August 2019. It accelerated thereafter and the spike in prices of onion and tomato added to the woes, India Ratings and Research (Ind-Ra) said.
Overall food inflation rose to 14.12 per cent in December as against (-)2.65 per cent in the same month of 2018 — it was 10.01 per cent in November 2019. The previous high in retail inflation was witnessed at 7.39 per cent in July 2014, the year the NDA-II government assumed office for the first term.
Retail inflation has crossed the upper bound of the range to be maintained by the Monetary Policy Committee of the RBI. The central government has mandated the central bank to keep inflation in the range of 4 per cent with a margin of 2 per cent on either side.
The RBI, which mainly factors in CPI-based inflation, is scheduled to announce its next bimonthly monetary policy on February 6. In its December policy, it had kept the repo rate unchanged citing inflationary concerns against consensus expectations of a 25 basis point cut in the repo rate.
“Inflation is likely to moderate marginally in the coming months but would continue to remain at elevated levels. Statistically, CPI inflation will be handicapped by low base effect in January which will increase in the next two months. On the other hand, moderation in prices of onions and other vegetables, which has already been witnessed in January, could support the moderation in overall inflation,” said Madan Sabnavis, Chief Economist, CARE Ratings.
He said the RBI is expected to maintain status quo on policy rates going forward, mainly due to higher than targeted level of inflation and fiscal challenges faced by the government.
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