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December CPI eases to 9.87%; RBI may extend 'pause'

Tuesday, 14 January 2014 - 11:36am IST | Place: Mumbai | Agency: DNA

Led by moderation in food prices, the consumer price index (CPI) or retail inflation eased to 9.87% in December from November’s 11.16% (revised downwards from estimated 11.24%).

Price rise in the food and beverages component was down to 12.16% from 14.76% in November with vegetables price inflation down to 38.76% from 61.6% in the same period. Inflation in fuel and light category remained almost unchanged while ‘clothing, bedding and footwear’ rose to 9.25% from 8.94% in November.

“The moderation in headline CPI inflation, in the light of the fall in industrial production in November, has added to the case for a pause in the January policy,” said Aditi Nayar, senior economist at ratings agency ICRA. The index of industrial production (IIP) fell by 2.1% in November as compared to a contraction of 1% a year ago.

The Reserve Bank of India (RBI) is slated to announce the third-quarter monetary policy review on January 28. The central bank had opted to wait and watch in the mid-quarter policy review last month despite a spike in the CPI.

Policy rates were kept unchanged after two consecutive hikes in September and October.

Economists expect the RBI to extend the pause this month.

“Based on CPI data, it looks like the RBI will leave the policy rates unchanged but we need to wait for the wholesale price inflation as well,” said A Prasanna, chief economist at ICICI Securities Primary Dealership. He expects the December WPI to come at 6.9%, down from 7.5% in November.

“Even if the headline WPI remains well-behaved from the RBI perspective, the bigger worry continues to be on the relative stability of core inflation,” said Indranil Pan, chief economist at Kotak Mahindra Bank.

Core inflation continues to be a concern. “Led by upward pressure from clothing and housing sectors, core CPI inflation continues to remain sticky around 8% levels despite volatility in food prices and the slowdown in services sector growth momentum. Core WPI inflation has started trending up and is expected to breach 3.5% by March from the current levels of 2.6%,” said Shubhada Rao, chief economist at YES Bank.

While the RBI may well not take any policy action this month, it does not mean the end of the rate hike cycle. Economists expect one more rate hike of 25 basis points, possibly by the end of this fiscal. “While growth indicators continue to create a bias for status quo on policy rates, it is also important to safeguard against the spillover impact on core inflation and inflation expectations,” said Rao in a note.

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