India's Consumer Price Index (CPI), which measures the country's retail inflation, eased to 4.59 percent in December versus 6.93 percent in November.
This month's CPI has fallen within the Reserve Bank of India’s (RBI) upper margin of 6.
The Consumer Food Price Index (CFPI) or the inflation in the food basket eased to 3.41 percent in the month of December, down from 9.50 percent in November, as per the data.
This data also showed that this decline in retail inflation was mainly due to easing food prices.
"After eight months, the inflation rate has fallen back to the permissible range. The decline is mainly contributed by the fall in food prices, especially vegetables. Vegetable price registered a negative growth rate of 10.4 percent YoY in December 2020," Deepthi Mathew, Economist at Geojit Financial Services, pointed out.
On the other hand, the Index of Industrial Production (IIP) contracted 1.9 percent for November 2020, showed the data released by the Ministry of Statistics and Programme Implementation (MoSPI) on January 12.
The factory output in the country had grown at 3.6 percent in October.
The previous high recorded was in February 2020, when IIP rose 5.2 percent, while it plunged to 0.48 percent in September 2020 following the dry months after the COVID-19 lockdown.
On a year-on-year basis, the IIP for November in 2019 grew 2.1 percent.
Though the fall in inflation is a relief, contraction in IIP is a matter of concern as it shows the persisting weak demand in the economy.
While the inflation has eased and the economic growth rate is still limping, can the Reserve Bank of India (RBI) think of cutting rates in its upcoming monetary policy meet which is scheduled for February 3 to 5, 2021?
It is too early to think that the RBI has enough room to cut rates further. First of all, the key lending rates are already at a very low level and the risk of inflation rising again is higher.
Analysts believe it is unlikely that the central bank will ignore all this and slash rates further.
"India's December CPI has come as a surprise, lower than the market expectations. It is after April 2020 that the inflation has come in between RBI’s medium target range of 2-6 percent. However, with increasing crude oil prices and fears over bird flu, inflation may remain sticky for some time," said Rahul Gupta, Head of Research- Currency, Emkay Global Financial Services.
"This may give RBI some room to cut interest rates but in our view, the central bank may continue its pause at the February policy and look out for more incoming data," Gupta added.
Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, has a similar view.
"In our opinion, broad-based inflationary pressures would nevertheless persist due to tax-driven higher retail fuel prices, increasing commodity prices and its impact on core inflation which is already at the levels of 5.5-5.7 percent. While the CPI print has nearly come down to the comfort level of the MPC, we believe that the likelihood of further easing is very low and an extended pause on the interest rates can be expected. The 10-year G-Sec yields are expected to remain within a narrow range in the near term," Chowdhury said.
Rahul Bajoria, Chief India Economist, Barclays India, expects CPI inflation to average closer to 5 percent in the first quarter of the calendar year 2021, versus the RBI’s projection of 5.8 percent, taking average FY21 inflation to 6.2 percent.
In such a scenario, Bajoria pointed out, monetary policymakers might opt to look through the part- base effect driven, temporary moderation in consumer prices.
"Even with its announced withdrawal of liquidity, we do not see the RBI signalling any policy tightening with falling inflation, and it may continue to remain on the sidelines, with little chance of a rate move in either direction in the first half of the year 2021," said Bajoria.
Rupen Rajguru, Head, Equity Investments & Strategy, Julius Baer India, expects inflation to average between 5-6 percent in CY21. He believes that the interest rate cycle has bottomed out in India.
"RBI has already started with baby steps towards liquidity normalisation. More steps are likely to be taken in the first half of CY21, followed by expectations of reversal of emergency policy measure and change of policy stance in the second half of CT21," Rajguru said.
He pointed out that the RBI has been at the forefront to support growth recovery and in the process has infused significant liquidity over the last 18 months because of which the real rates have turned negative.
"From here, on growth-related measures, the RBI has limited elbow room. Having said, we believe that the RBI would ensure that policy normalisation to happen in a non-disruptive way," he said.
For now, the central bank would like to keep itself focussed on inflation and leave the growth part for the government.
"Going ahead, the government will have a larger role to boost the economy and the Union Budget can set the direction for the same. Since consumption recovery is already underway on account of low-interest rates and social spending by the government, in the Union Budget, the Finance Minister can lay down the foundation for boosting long-term growth by focusing on government CAPEX/infrastructure spends which needed to kick start the investment cycle and spur job growth in the economy," said Rajguru.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.