India: inflation seen moderating into 2020 – UOB

Economist at UOB Group Barnabas Gan gives his views on the recently published inflation figures in India.

Key Quotes

“India’s headline inflation surged 7.35% y/y in December 2019, surprising market estimates for a mere 6.70% and clocking its highest rate since July 2014. However, core inflation remains tame at 3.7% y/y in the same month, slightly higher than 3.5% in November. Note that headline inflation had breached the upper end of the Reserve Bank of India’s (RBI) 2 – 6% target band for the first time since July 2016, in which policy-makers had previously kept its benchmark rate unchanged citing “much higher than expected” inflation. Accounting for December’s inflation, India’s consumer prices had risen by an average of 3.7% for the full year of 2019.”

“The risk of higher food prices had been documented in the latest RBI monetary policy statement as well as the meeting minutes in December 2019.”

“Higher energy prices could have also led inflation higher in December, owing to the positive uptick in fuel and light prices, as well as the rise of transport & communication costs.”

“Going forward, inflation may moderate lower into 2020 ... More importantly, given that inflation had surpassed RBI’s inflation range of 2 – 6% to-date, policy makers could remain reluctant to inject further accommodative measures via rate cuts in its upcoming February MPC meeting as it may exacerbate the increase in consumer prices in the year ahead. Still, we pencil one more rate cut in the first quarter of 2020 should India’s domestic economy remains weak amid a soft automobile industry, poor external environment and an uncomfortably high unemployment rate.”