Indian headline inflation decelerates sharply in November, RBI likely to be on long pause

India’s headline inflation decelerated sharply in November, coming in below consensus expectations. On a year-on-year basis, inflation slowed to 2.33 percent. The moderation was driven by a fall in food and transportation prices.

On a sequential basis, headline consumer price index rose 0.07 percent in the month, a slowdown from 0.36 percent rise seen in October. Base effects were partially at play. On a year-on-year basis, the inflation has eased to a 17-month low. With this, inflation has printed below the central bank’s medium target of 4 percent for the fourth consecutive month, drifting towards the lower end of the target range of 2 percent to 6 percent.

The easing in the inflation print was mainly due to a fall of 0.14 percent sequentially in food prices. This is the third consecutive month that food prices have fallen. It is clear that the recent rise in minimum support prices of up to 50 percent above the cost of cultivation to farmers has not pushed up food inflation.

Furthermore, in November, the fall in food prices was because of a fall in prices of vegetables and cereals. With the food basket comprising 45.9 percent of the overall CPI index, it is not surprising that food prices are dragging overall inflation lower.

Transport and communication category also weighed on the headline print due to declining crude oil prices. It dropped 1.1 percent sequentially in November compared to a rise of 0.71 percent in October.

As anticipated, core inflation also eased to 5.73 percent year-on-year in November, after picking up in October. Decelerating domestic demand is expected to have added to the sequential moderation in core inflation to 0.25 percent sequentially in the month, down from 0.83 percent sequentially in October.

“The November CPI print reinforces our view that inflation is likely to average below the RBI’s target of 4 percent in FY19. Accordingly, we expect the RBI to be on a long pause”, said ANZ in a research report.