December Relief Seen For Inflation As Vegetable Prices Fall: Nomura
Vegetable prices fell in December, suggesting retail inflation may ease further, according to Nomura.
Prices of vegetables—having the highest weight after cereals among food and beverages in the Consumer Price Index—contracted 19.2% month-on-month in December, the research firm estimated. Sharp unseasonal hikes since September had led to a cumulative rise of 40.6 percentage points in prices, Nomura said in its report published on Tuesday. Also, prices of pulses and cereals contracted on a monthly basis, while edible oils, tea and eggs rose.
“We expect headline inflation to fall sharply to about 4.9% on an annual basis in December compared to 6.9% in November,” Sonal Varma and Aurodeep Nandi, India Economists at Nomura, said.
Vegetable inflation had fallen to 15.63% in November from 22.5% in October. That dragged the CPI inflation down to 6.93% from 7.61% during the period. Retail inflation data for December 2020 is scheduled to be published on Jan. 12, 2021.
While lower food price inflation, lagged effects of muted demand and base effects should drive inflation lower in the short term, for 2021, “the golden window of growth-induced disinflation is fast closing,” Nomura said. Rising input costs, steadily firming demand and a gradual return of pricing power suggest sticky core inflation, which should keep headline inflation above the Reserve Bank of India’s 4% target in 2021, it added.
As such, despite some wiggle room to the RBI’s inflation targeting constraint, Nomura expects the status quo on policy rates to continue this year, while sticky core inflation should support gradual liquidity normalisation April onwards.