The Consumer Price Index (CPI)-based inflation rate eased to 5.72% in December. It was 5.88% in November, and 6.77% in October 2022.
The government has mandated the RBI to maintain retail inflation at 4% with a margin of 2% on either side for a five-year period ending March 2026.
Lower food prices, particularly the fall in vegetable prices, helped keep inflation within the tolerance range.
Food inflation, which accounts for about 40% of the inflation basket, came in at 4.19% in December as against 4.67% in the preceding month.
Aditi Nayar, Chief Economist, ICRA, said: “We expect the core inflation to remain elevated in Q4 FY2023, given the continued pass-through of higher input costs by producers and sustained robust demand for services.”
“We caution that the CPI inflation for January 2023 may print at ~5.8-6.0%, slightly higher than the levels seen in December 2022, given the stickiness in core inflation and an unsupportive base for food inflation,” Nayar added.
“This inflation print should nudge the RBI to reduce the quantum of its rate hike in February to 25 bps. Going forward, inflation is expected to average 6.5% in FY23 and 5.2% in FY24,” said Sakshi Gupta, Principal Economist at HDFC Bank.
“That said, for the next fiscal, there are emerging risks to the inflation outlook next year, particularly in regards to any rise in commodity prices due to the China reopening underway and the continued stickiness in core inflation. As a result, the RBI is likely to remain watchful and we do not see the possibility of a turn in the interest rate cycle (rate cuts) in FY24,” Gupta added.
“It is a double delight as the January CPI inflation has stayed below the 6% mark for two months in a row. The fall is largely due to the softness in the vegetables and food inflation. But the core inflation is a cause of concern as it has remained above the 6% mark. The effects of rising rates have started to reflect in the overall inflation data,” said Nish Bhatt, Founder & CEO, Millwood Kane International.
“December CPI headline came in softer than expectations, largely led by lower food prices. However, core inflation continues to remain elevated and sticky,” said Upasna Bhardwaj, Chief Economist of Mumbai’s Kotak Mahindra Bank.
To rein in inflation, the Reserve Bank of India has raised interest rates by 225 basis points, including a 35 basis points hike last week.
November IIP growth
On the other hand, the factory output, measured in terms of the Index of Industrial Production (IIP), jumped 7.1% in November as against 4% in October, according to the government data.
“While we had expected the IIP performance to rebound, the print was much stronger than expected at 7.1% in November 2022 as compared to the woeful contraction of 4.2% in October 2022, with a reversal of the base effect related to an early festive season. However, the YoY growth of most available high frequency indicators has moderated in December 2022 relative to November 2022, partly reflecting an unfavourable base related to the post-festive season rebound seen in December 2021. In line with this, we expect the overall IIP growth to moderate to low single digits in December 2022,” the ICRA Chief Economist said.
US CPI likely to moderate
US consumer prices index (CPI) is also expected to have moderated in December. The report is due at 7 pm IST.
According to a survey by the data provider FactSet, analysts have predicted that consumer prices rose 6.5% in December compared with a year earlier. That would be down from 7.1% in November and well below a 40-year high of 9.1% in June.
This Monday, the Federal Reserve Bank of New York said that consumers now anticipate inflation of 5% over the next year. That’s the lowest such expectation in nearly 18 months. Over the next five years, consumers expect inflation to average 2.4%, only barely above the Fed’s 2% target.
Fed Chair Jerome Powell has sought to push back against that expectation of fewer hikes this spring and cuts by the end of the year, which can make the Fed’s job harder if investors bid up stock prices and lower bond yields. Both trends can support faster economic growth just when the Fed is trying to cool it down.
The minutes from the Fed’s December meeting noted that none of the 19 policymakers foresee rate cuts this 2023.
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