Mumbai, November 13: Retail inflation surged to 4.62 per cent in October, mainly on account of higher food (vegetables) prices, according to government data released on Wednesday.
Analysts said this news should be taken as a warning signal by the policy makers as not only the inflation rate has spiked but also other indicators like PMI and IIP data released recently has pointed out towards weakness in the economy and slow down gathering momentum.
The inflation based on Consumer Price Index (CPI) was 3.99 per cent in September and 3.38 per cent in October 2018. The inflation in the food basket spiked to 7.89 per cent in October 2019 as against 5.11 per cent the preceding month.
The Reserve Bank of India (RBI) mainly factors in the CPI based inflation to arrive at its bi-monthly monetary policy. The RBI has been asked to keep the retail inflation at around 4 per cent.
Vinod Nair, Head of Research, Geojit Financial Services, said, "Inflation being above RBIs forecast (of 4 per cent) and weak economic data like PMI & IIP will alert market to turn cautious. Post the recent rally the fact is that valuation of the market has peaked higher while earnings growth was behind. GDP data, likely to be released at the end of the month, the expectation for which has worsened below 5 per cent, noted in Q1FY20”.
Analysts also said though CPI based inflation figures have moved up from the comfort zone of 4 per cent, the RBI will continue its accommodative stance with respect to growth and the interest rate easing cycle will be pursued further. They said, the rise in inflation is a temporary phenomenon and with the Kharif arrival picking up and optimism with respect to Rabi season crop the average inflation for the FY20 will be well under 4 per cent target.
Amar Ambani, Head of Research-Institutional Equities, YES Securities said, “CPI inflation moved above 4.5 per cent on account of sharp uptick in vegetables prices. However, the spurt in food price inflation is seen to be transient and expected to get offset by arrival of Kharif produce, and better prospects for Rabi sowing. Inflation is expected to average at 3.5-3.7 per cent in FY20, assuming crude oil price at USD 65-70/bbl and moderation in core price pressures. It is imperative for the RBI to remain accommodative and support growth. With CPI inflation projected to average below 4 per cent amid widening negative output gap, we expect RBI to deliver another 25-40 Bps in the rest of FY20, before getting into a prolonged pause.”
With respect to easing rate cycle, Nair said, “RBI is unlikely to change its monetary policy stance soon and will continue to maintain its descending rate strategy with an accommodative stance to support the weakening economy”.
But, he cautioned that more hikes in future inflation forecast will incline to develop a careful strategy in the future. “But further hike in inflation forecast will demand a more careful strategy in the future", he added.
Ambani said, “Slowing growth will dominate the attention of the central bank rather than temporary spike in food inflation. Flow of frequency indicators reaffirms the broad-based slowdown in economic growth. Near term growth momentum is projected to remain lacklustre with FY20 GDP growth estimated at 6 per cent with downside risks”.