Retail inflation at 23-month high

Odds of a repo rate hike by the Reserve Bank of India (RBI) on December 18 are up as  retail inflation, as gauged by the consumer price index (CPI), accelerated to a 23-month high of 11.24% in November from 10.09% in October, mainly on he back of higher food inflation.

With this, the CPI is at its highest recorded value since it was introduced in January 2012.

The CPI food inflation that has remained in double-digit figures in the last 20 months, surged 14.72% on-year from 12.56% in October to its highest recorded level since its introduction.

Experts blamed it on a 61.60% rise in the price of vegetables along with a 15% rise in fruit prices in November due to lower supplies.

The rise in CPI inflation was higher in rural areas at 11.74% even as urban CPI jumped by 10.53%.

Shubhada Rao, chief economist at YES Bank, believes that the CPI numbers were much higher than expected. And they are likely to increase the probability of a 25 bps repo rate hike, she said. But Rao said the expected rate hike may not happen after all.

“While focus on inflation remains a key priority for the RBI, the economy continues to remain in contraction mode and this may make the cental bank’s task quite challenging. Given the nascent stage of economic recovery, there is not much room for further rate hikes. But, at the same time, it’s difficult to ignore a bad CPI number which has come at its highest level till date,” Rao said.

Meanwhile, the country’s Index for Industrial Production (IIP) shrunk 1.8% in October, worse than Bloomberg’s consensus expectation of 1.2% de-growth, highlighting that structural issues plaguing the economy have still not eased.

Manufacturing, which constitutes three-fourths of the IIP, witnessed a de-growth of 2% while the mining segment, too, contracted by 3.5% on-year.

The IIP data was nevertheless in line with expectations as data for eight core industries that have a combined weight of about 38% in the IIP, which was released in the first week of this month, had shown a 0.6% contraction in October.

A Prasanna, cheif economist at ICICI Securities Primary Dealership, says that overall economic growth remains quite weak as of now, but is likely to improve in the coming months.

“The IIP has been lower than expectations even as headline retail inflation has surged. Given the weak growth, its difficult to say what the RBI may do next weak. Anecdotally, it seems that the CPI may have peaked in November as core CPI inflation has remained flat. Therefore, it’s a close call but odds for a rate hike have definitely increased,” he said.