Indian CPI inflation surpasses upper limit of RBI’s target band in December, likely to remain elevated in January

India’s consumer price inflation accelerated above the upper limit of the RBI’s target band of 2-6 percent in December, the first time since July 2016. On a year-on-year basis, the headline inflation accelerated to 7.35 percent from November’s 5.54 percent, coming above market expectations of 6.7 percent. On a sequential basis, the headline CPI rose 1.21 percent, rising from 0.95 percent in November.

On a year-on-year basis, food prices rose 12.16 percent from November’s 8.73 percent, representing the first double-digit rise in six years. The rise was mainly driven by an increase in the prices of vegetables and pulses. Within vegetables, the prices of onions rose 328 percent, adding 2.1 percent to the headline inflation. Excluding onion prices, inflation came in at 5.21 percent in the month. In the meantime, fuel inflation rose for the first time in six months.

Core inflation accelerated for the second consecutive month, led by the miscellaneous category, and by ‘transport and communication within it, which rose 4.77 percent from 0.88 percent in November.

Today’s inflation figure has exceeded the upper band of the RBI’s inflation target of 2 to 6 percent for the first time since July 2016.

“We expect inflation to remain elevated in January but begin to cool off from February as base effects turn more favourable. Onion prices month-to-date have begun trending lower. Despite this, overall CPI will likely remain above 5 percent for the next 2-3 months. With this, a rate cut in February is very much off the table. However, we continue to expect the RBI to keep the door open for another cut, next in June as: 1) inflation begins to moderate as food inflationary risks subside; and 2) subdued growth keeps the output gap wide”, said ANZ in a research report.