India’s headline inflation undershoots expectations in December

India’s consumer price inflation came in below market projections in December, owing to decline in food prices. The country’s headline inflation accelerated to 3.41 percent in December from November’s 3.63 percent, as compared with market expectations of 3.51 percent. The downside surprise was greatly because of higher than expected fall in prices of pulses and perishables. 

The food inflation outlook continues to be benign because of a strong winter crop output and anticipations of robust agricultural growth. In spite of demonetization, winter crop sowing is up 6 percent year-on-year as of 7 January and has been completed in 96 percent of normal areas, noted ANZ in a research report.

Inflationary pressures have continued to ease on cyclical and structural fronts. This is because of a good monsoon and supply management by government. The CPI is likely to come below the RBI’s March 2017 inflation target of 5 percent by 50-60 basis points. The Reserve Bank of India is expected to make a final 25 basis points rate cut in the fourth quarter of FY2017.

The core inflation’s downward inflexibility, along with modestly falling but high inflationary expectations, continues to be a concern. This might restrict monetary policy space in spite of the slack in the economy post demonetisation.

“Going forward, we expect CPI inflation to average 5.4 percent in FY2018 from our estimate of 4.3 percent in FY2017. We expect CPI to be closer to 6 percent in H2 FY2018 because of the implementation of GST, volatility in crude oil prices, and an adverse base effect”, added ANZ. 

Moreover, the imminent raise in house rent allowance because of the Seventh Pay Commission payouts would possibly contribute around 125 basis points to consumer inflation.