India's retail inflation eased to a 15-month low in December on the back of moderating prices of some food items, including vegetables, and came within the Reserve Bank of India’s target but economists said the central bank would wait and watch before moving on interest rates.
Data released by the National Statistical Office (NSO) showed retail inflation, as measured by the consumer price index, rose an annual 4.6% in December, slower than the 6.9% in the previous month and well below the 7.4% in December 2019. Rural inflation was at 4.1%, while urban at 5.2%. Inflation in the food segment eased to a 16-month low of 3.9% compared to 8.8% in November 2020. The easing was largely led by a decline of 10.4% in vegetable prices during the month. However, several food items, such as meat, fish and eggs, oils and fats, pulses and products remained in double digits.
The sharp easing of retail inflation comes as a huge relief as persistent inflationary pressures had prompted RBI to pause its interest rate cutting cycle. It had remained above the central bank’s target for eight months in a row and economists said the average between April and December was at 6.6%. Core inflation (excluding food and fuel) eased to 5.7% in December compared to 5.8% in the previous month.
“Inflation is cooling, finally edging closer to the 4% target average pursued by the Reserve Bank of India. The December consumer price index is cause for relief for the bank’s monetary policy at a time when manufacturing and business investment are highly reliant on an accommodative repo rate. Dramatic cooling in food prices was essential to this result; slower price appreciation in the rural economy, after the reverse was true for much of 2020, is providing some relief to the growing ranks of the rural poor,” Moody’s Analytics said in a note.
Separate data showed industrial output contracted by 1.9% in November after festival demand driven expansion in the past two months. NSO data showed the October number was revised upwards to 4.2% from the previously estimated 3.6% growth. Between April and November the contraction was at 15.5% compared to a growth of 0.3% during the same period earlier year. The manufacturing sector contracted 1.7% compared to a growth of 3% in November 2019.
Economists expect the recovery to be gradual and uneven but the arrival of vaccines is expected to help boost sentiment and expansion. “A combination of loss of working days in a festivity heavy month along with a negative base are likely to have weighed on manufacturing activity. In addition, the initial pent up demand post easing of lockdown, along with festive seasonality support, IIP is likely to have taken a breather in November,” analytics firm QuantEco said in a note.
