India

VIEW 4 India's retail inflation eases to 4.59% y/y in December - govt

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Jan 12 (Reuters) - India's retail inflation (INCPIY=ECI) eased to 4.59% in December from a year ago, mainly helped by a sharp fall in vegetable prices, government data released on Tuesday showed, falling within the central bank's target of 2%-6% after eight months.

Analysts in a Reuters poll had predicted the annual inflation at 5.28% for the month.

COMMENTARY

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ADITI NAYAR, PRINCIPAL ECONOMIST, ICRA, GURUGRAM

"Overall, we expect the CPI inflation to record a measured further dip in January 2021, followed by a base-effect led uptrend in the remainder of FY2021."

"With the CPI inflation expected to continue to exceed the MPC's 4.0% target during FY2022, we do not expect any more rate-cuts in this cycle, despite the sharp slackening in the headline inflation rate in December 2020."

"We continue to expect the stance of the Monetary Policy to be changed to neutral from accommodative in the August 2021 Policy review or later, only after there is greater certainty on the durability of the awaited economic revival."

RUPEN RAJGURU, HEAD OF EQUITY INVESTMENT & STRATEGY, JULIUS BAER INDIA, MUMBAI

"Overall, we expect inflation to average between 5% and 6% in CY21. We believe that the interest-rate cycle has bottomed out. The RBI has already started with baby steps towards liquidity normalisation. More steps are likely to be taken in the first half of calendar year 2021, followed with expectations of reversal of emergency policy measure and a change of policy stance in H2 of CY21."

"From here, on growth-related measures, the RBI has limited elbow room. Going ahead, the government will have a larger role to boost the economy and the Union Budget can set the direction for the same."

SIDDHARTHA SANYAL, CHIEF ECONOMIST AND HEAD OF RESEARCH, BANDHAN BANK, KOLKATA

"Today's CPI print largely reflects normalisation of the inflation picture, as bulk of the inflation spike earlier during H2 2020 came in from surging food inflation, even though prices of industrial commodities and energy were largely anchored reflecting weak demand."

"However, we expect policymakers to stay cautious in interpreting the inflation trend, given the high volatility of the prints and recent upticks in prices of several commodities (e.g. metals, energy, food) globally. While there is surely an element of immediate relief, the fixed-income market might also stay away from exuberance and wait for the RBI's guidance as regards liquidity management in the coming months."

SHASHANK MENDIRATTA, ECONOMIST, IBM, NEW DELHI

"This is the first time in nine months when inflation has printed within the RBI's 2%-6% target range. Core inflation eased marginally, led by a seasonal decline in housing and lower personal care costs."

"However, the overall trend in core prices remains sticky. Despite a moderation in inflation, room for rate-cuts is limited as the central bank will likely wait for inflation to remain under the target band on a durable basis. Having said that, we think that the central bank will continue to remain in an accommodative stance to support the nascent recovery."

RAHUL GUPTA, HEAD OF RESEARCH-CURRENCY, EMKAY GLOBAL FINANCIAL SERVICES, MUMBAI

"India's December CPI has come as a surprise, lower than the market expectations. The significant drop in vegetables and food prices has led to a sharp fall in the inflation data."

"It's after April 2020 that inflation has come in between RBI's target range of 2%-6%. However, with an increase in crude oil prices and fears over bird flu, inflation may remain sticky for sometime. This may give the RBI some room to cut interest rates but in our view, the central bank may continue its pause at February's policy and look out for more incoming data."

ANAGHA DEODHAR, CHIEF ECONOMIST, ICICI SECURITIES, MUMBAI

"This inflation print is sharply lower than our expectation. Food prices drove the softening in inflation."

"Although a high base is partially responsible for the decline, cheaper cereal and vegetable prices were the primary drivers of decline in food inflation. Core inflation also fell moderately to 5.66% from 5.84% in the preceding month."

"This should provide a big relief to the MPC as persistently high inflation has been a cause of concern."

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

"Headline inflation coming close to the RBI's target band is a relief and should provide the central bank space to chart a slow exit for the crisis-level monetary policy. However, core CPI near 5% and rising input costs due to commodity price inflation is a concern that needs to be monitored."

SAKSHI GUPTA, SENIOR ECONOMIST, HDFC BANK, GURUGRAM

"We expect inflation to fall further in January, as prices of animal proteins also decline sharply due to the spread of the bird flu. That said, while the near-term inflation outlook has turned favourable, risks remain in terms of rising fuel prices and core inflation inching up as demand pressures rise."

"We expect the RBI to keep rates on hold for the whole of 2021."

SUMAN CHOWDHURY, CHIEF ANALYTICAL OFFICER, ACUITÉ RATINGS & RESEARCH, MUMBAI

"The drop in food inflation from 9.5% to 3.4% has indeed surprised on the downside, albeit the sustainability of such low food inflation would need to be seen."

"Broad-based inflationary pressures would nevertheless persist due to tax-driven higher retail fuel prices, increasing commodity prices and its impact on core inflation, which is already at the levels of 5.5%-5.7%."

"While the CPI print has nearly come down to the comfort level of the MPC, we believe that the likelihood of further easing is very low and an extended pause on the interest rates can be expected. The 10-year G-sec yields are expected to remain within a narrow range in the near term."

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

"The extent of the drop in food prices (from 9.5% to 3.4%, an unprecedented 6%-plus drop in a single month) surprised everybody. With the food component having nearly 40% weightage in the overall consumption basket, it is not a surprise that headline inflation would melt."

"That said, core inflation still remained quite sticky and dropped only a tad to 5.7% from 5.8%. Nevertheless, this comes as a mighty relief for the RBI after seeing inflation consistently exceeding the upper band of its acceptable target."

"While this is unlikely to result in a rate-cut in the next meeting, a consistently low reading over the next few months would definitely bring the rate-cut back to the table. As of now, we expect the RBI to cut the rate once again in 2Q21."

GARIMA KAPOOR, ECONOMIST - INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI

"The sharp fall in December CPI inflation is in line with our estimate of 4.5%. It is led by a slump in food prices amid robust Kharif crop arrival and continued normalisation of supply chains."

"Notwithstanding the current softening in headline CPI, we believe CPI inflation in FY22 is likely to average 5%. With policy normalisation expected to gain momentum by Q1FY22, we expect the MPC (Monetary Policy Committee) to change the monetary policy stance in H2FY22 and anticipate one rate hike of 25 bps in Q4FY22, assuming no change in monetary policy framework."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"The major takeaway from the numbers is that there were worries over liquidity tightening due to higher inflation. The RBI (Reserve Bank of India) was under tremendous pressure to think about liquidity withdrawal. That pressure will ease on the RBI and this is pretty positive for both the bond and equity markets. The immediate thing is that there won't be any talk of liquidity withdrawal and the talk of rate hike goes off the table. If the inflation falls below 4% and remains so for a couple of months, then the possibility of a rate-cut cannot be ruled out."

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Reporting by Anuron Kumar Mitra and Nallur Sethuraman in Bengaluru; Compiled by Uttaresh.V

Our Standards: The Thomson Reuters Trust Principles.

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