India’s Retail Inflation Surges In September, But Rate Cut Hopes Still High

India’s retail inflation rose close to the central bank’s medium-term target of 4% in September for the first time in 14 months, but analysts still predict a sharp economic slowdown will prompt a sixth consecutive interest rate cut in December.

Annual retail inflation rose to 3.99% last month, driven by higher food prices, up sharply compared with 3.21% in the previous month, and higher than the 3.70% forecast in a Reuters poll of analysts.

Retail food prices, which make up nearly half of India’s inflation basket, increased 5.11% in September from a year earlier, compared with 2.99% in August.

“The uptick in September was backed by sharp sequential uptick in food components, primarily led by vegetables prices. We think the food inflation seasonal uptrend will likely continue in the near term before easing later.”

“We see headline inflation averaging around 3.7%-3.8% for FY20 and expect the headline print to fiddle above 4% in early part of 1HCY20, but not significant enough to derail the rate-cut cycle.”

“Some signs of sequential bottoming of food prices are emerging, while there could also be increased policy focus ahead to correct food anomalies to favour agriculture terms of trade.”

“On the other hand, we continue to see core inflation component fiddling a tad above 4% average in FY20, but admittedly moderating sharply from 5.8% in FY19. That said, the output gap remains significant, we continue to see rate cut cycle extending beyond October by at least another 50 bps, depending on the incoming data ahead.”

“Reflection of higher inflation in select food items has now begun to show in retail inflation as inflation in meat and fish, vegetables, and pulses jumped in September 2019.”

“Vegetables and pulses contributed 76.4% of the increase in retail inflation in September over August. Food inflation would continue to rise at least till March 2020 mainly due to base effect. The other items exerting pressure on retail inflation in September 2019 are expenditure on health, education and personal care.”

“Given the ongoing slowdown in the economy and retail inflation remaining well within the target range of the RBI, India Ratings and Research believes RBI will continue with accommodative policy and expect further rate cut in the policy review of December 2019.”

“It is mainly prices of vegetables and pulses that have pushed the (inflation) rate higher. With a good monsoon having come to a close, its moderating impact may be felt on the price level due to improved supply of produce.”