Indian headline inflation accelerates further in January, likely to ease from February

Indian headline inflation surpassed the upper bound of the Reserve Bank of India’s target band of 2-6 percent for the second consecutive month in January. On a year-on-year basis, the consumer price inflation accelerated to 7.59 percent from December’s 7.35 percent. Market expectations were for an acceleration to 7.40 percent.

Sequentially, the CPI dropped 0.13 percent in January, after a rise of 1.21 percent in December. Food prices eased for the first time in six months but still came in high at 11.79 percent. This is a slight slowdown from December’s 12.14 percent.

Vegetable prices slowed from December highs, but the prices of other products such as meat, eggs, pulses, spices and cereals continued to trend upwards. Within vegetables, the prices of onions rose 245 percent though lower than the 327 percent rise seen in December. Subsequently, the difference between headline inflation and CPI excluding onions narrowed to 1.5 percent from December’s 2.1 percent. In the meantime, fuel inflation surged to 3.66 percent on higher domestic fuel prices, including that of cooking gas.

Core inflation accelerated for the third consecutive month, coming in at 4.16 percent in January from December’s 3.77 percent. All major subcomponents except housing saw a rise in prices. The ‘Transport and Communication’ component rose further to 6.08 percent, reflecting the continued effects from the telecom rate hikes that were effective starting December, said ANZ in a research report.

The headline inflation is expected to ease from February as base effects turn more favourable. Despite that, the gradual build-up in core inflationary pressures are expected to keep the headline print elevated, closer to the upper bound of the RBI’s target band in the next two to three months, said ANZ.

“Given the continued build-up in inflation, a rate cut in April seems unlikely. In our view, the earliest the RBI can resume cutting rates is in June”, added ANZ.