A vendor counts money in a vegetable stall in Gangtok, Sikkim, India (Photographer: Prashanth Vishwanathan/Bloomberg)  

India’s Consumer Inflation Rises To 15-Month High In November

Consumer prices in India rose to a 15-month high in November due to the ongoing seasonal surge in vegetable prices and an unfavourable base effect from last year, breaching the the Reserve Bank of India’s medium term target for inflation.

Retail inflation accelerated to 4.88 percent over the same month last year, according to data from the Central Statistics Office. CPI Inflation in October had stood at 3.58 percent, while it was at 3.28 percent in September. Economists polled by Bloomberg had expected inflation much lower at 4.29 percent.

The surge in inflation was led by a 22.5 percent rise in the prices of vegetables. Higher vegetable prices, particularly the seasonal surge in onions and tomatoes, have kept India’s inflation on the rise since July, after hitting an all-time low.

Inflation has breached the RBI’s medium term target. (Source: BloombergQuint)
Inflation has breached the RBI’s medium term target. (Source: BloombergQuint)

Onions And Tomatoes

Onion and tomato prices rose roughly 30 percent in November from already-elevated levels in October, according to Bloomberg Intelligence Economics. Retail prices are now running at nearly three times their normal levels, it added.

The next two months may see an uptick in inflation but a turn is likely beyond that, wrote Bloomberg economist Abhishek Gupta in a prior note. He expects inflation to ease to 3.5 percent by March 2018 as new harvest of vegetables starts to roll in.

What’s more, adverse base effects in food prices will exert upward pressure on inflation until January.
Abhishek Gupta, Economist, Bloomberg Intelligence

The surge in onion prices was likely driven by a drop in sowing during kharif season due to unseasonal rains. Forty percent of India’s onion produce takes place during this season. However, that cannot be stored as it needs relatively low humidity. The late winter crop of onions is expected to arrive in December and January, while the rabi harvest of tomatoes will come in by March-April. This extra supply is expected to cool prices, Gupta added.

India’s Consumer Inflation Rises To 15-Month High In November

Enter Higher Oil Prices

Rising oil put further pressure on inflation. Brent crude prices increased 9.1 percent month-on-month during November. This would have affected fuel inflation and spilled over to the transport category, said Morgan Stanley research in a prior note.

A 10 percent rise in crude oil prices could lead to a 25-basis point increase in CPI inflation, if the government chose to pass on the full hike to consumers, wrote Tanvee Gupta Jain, economist at UBS Global Research, in a prior note. Rising oil prices will also have an indirect impact through higher production costs which may exert upward pressure on food inflation, she’d said.

The rise in headline inflation is "partially mitigated" by the reduction in Goods and Services tax rates in November for some household consumption items, Morgan Stanley said.

Surprising The RBI

Headline inflation has already breached the central bank’s revised forecast that consumer prices will range between 4.3-4.7 percent for the rest of the current fiscal. The RBI had held interest rates steady during its December monetary policy warning of upside risks to inflation and marginally increasing its estimates.

The central bank noted that the moderation in core inflation, which excludes food and fuel prices, seen in the first quarter, has now reversed.

There is a risk that this upward trajectory may continue in the near term.
Monetary Policy Committee Statement

It said that the “staggered impact” of house rent allowances will also push up housing inflation further in 2018 and acknowledged the recent rise in global crude oil prices. “Any adverse supply shock due to geopolitical developments could push up prices even further," the RBI said.

Economists that BloombergQuint spoke to earlier, suggested that the RBI is likely to hit the pause button on interest rates for the remainder of the current fiscal.

Inflation Internals

  • Consumer food prices went up 4.42 percent over last year compared to a 1.9 percent rise in October.
  • Prices of pulses and products fell 23.5 percent year-on-year. Prices have softened for the twelve straight months.
  • Fuel and light inflation stood at 7.92 percent compared to 6.36 percent in October.
  • Housing inflation stood at 7.36 percent, compared to 6.7 percent in October.
  • Prices of clothing and footwear went up 4.96 percent over last year compared to 4.76 percent in October.

Watch this interview with DK Joshi, chief economist at Crisil on what the data could mean for RBI policy going forward.