India’s Inflation Slows to 15-Month Low Before RBI Rate Decision

India’s consumer price inflation cooled to a 15-month low in December, boosting the case for the central bank to resume interest rate cuts to support the economy.

Consumer prices rose 4.59% last month from a year earlier, data released by the Ministry of Statistics showed Tuesday. That compares with the 5% median estimate in a Bloomberg survey of 37 economists. It is also the first time price-growth has returned within the Reserve Bank of India’s 2%-6% target band in nine months.

India’s Inflation Slows to 15-Month Low Before RBI Rate Decision

The Reserve Bank of India, which lowered borrowing costs by 115 basis points last year, has been on pause mode since mid-2020 even as its peers across the Asia Pacific have resumed easing to aid their economies weather the pandemic-induced downturn. The December inflation print, the lowest since September 2019, raises the possibility that India’s Monetary Policy Committee will once again look at employing the rate tool when it decides on policy Feb. 5.

“With inflation falling well within RBI’s 2%-6% mandate, we see the RBI MPC cutting rates by 25 basis points in February,” said Aastha Gudwani, an economist at Bank of America. “Fundamental factors of inflation remain under check -- low demand, contained depreciation, good rains, reasonable rabi sowing,” or winter crops.

What Bloomberg Economics Says...

“We expect the RBI to deliver a 25 bps repo rate cut to 3.75% at its Feb. 5 review and lower the policy rate to 3% by August 2021.”

-- Abhishek Gupta, India economist

To read the full note, click here

The MPC has vowed to keep its easing bias intact for as long as necessary to support the economy, which the government sees shrinking 7.7% in the year ending March -- the biggest contraction in records going back to 1952. The RBI’s own reading is for gross domestic product to decline 7.5% this year, while it sees inflation averaging 5.8% in the current quarter.

Key points from Tuesday’s price print:
  • Food inflation eased to 3.41% from 9.43% the previous month
  • Fuel and lighting prices rose 2.99%
  • Clothing and footwear costs rose 3.49%
  • Housing prices gained 3.21%
  • Separate data showed factory output declined 1.9% in November after rising 3.6% previous month

Easing headline inflation comes at a time when the central bank’s inflation targeting mechanism, put in place in 2016, is coming up for review this year. Critics, including some in Prime Minister Narendra Modi’s government, are seeking a widening of the inflation band so that the RBI can focus on doing more to stimulate growth.

Das has cautioned against such a change, saying it would render the targeting regime meaningless.

©2021 Bloomberg L.P.

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