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The falling falling inflation numbers for December has raised hopes for further status quo on rates, during the monetary policy review on January 28, amid weak growth.
A month after touching a record high, CPI inflation came down to a three-month low of 9.87% in December. While the Wholesale Price Index (WPI) inflation five-month low in December at 6.16% compared with 7.52% the previous month. Core inflation measured by non-food manufacturing inflation rose marginally to 2.8% in December and remained close to RBI’s threshold level of 3%.
“Although we expected another round of repo rate hike, the sharper drop in primary inflation and encouraging moderation in core inflation along with persistent growth weakness reflecting subdued domestic conditions will prompt RBI to maintain status-quo for the remaining part of the current fiscal realigning its stance more in favor of growth,” said Shubhada Rao, chief economist, YES Bank.
While holding interest rate during the mid quarter review in December, Raghuram Rajan, governor, RBI had said the central bank needs to be cautious on rate hikes as growth remains weak. He also expected vegetable prices to fall which merits a status quo in December. After hiking interest rates twice in September and October, by 25 bps each, Rajan opted for holding the repo rate in December.
"If the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, RBI will act," said Rajan in the policy statement.
The sharp deceleration in the price pressures in the headline provides comfort, but core inflation still remains sticky.
"We do believe that the decline in headline price pressures is significant enough, both at the wholesale and at the retail level, but the core inflation hasn’t declined. Thus, based on the exact guidance, RBI should hike the repo rate in the upcoming policy review, with the absence of softening in exclusion based metric acting as a trigger. However, we would again be surprised at such an outcome, if it is to materialise," said A Prasanna, chief economist, ICICI Securities PD.
According to Prasanna this would be due to two factors. For one, WPI non-food manufactured inflation remains below its historical averages and is within the RBI comfort bound. Even within core CPI, the miscellaneous component is showing signs of softening.
Besides that, while the assessment of “significant reduction in headline inflation” is left to subjectivity, it is believed that extent of softening in the headline inflation is more than expected, particularly in the WPI, that has favorable implications for expected price trajectories as well, said Prasanna. Due to these two factors he believes RBI may hold rates at current levels in the January policy review.
