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September inflation print surprises; will it cripple RBI's ability to keep rates low?

While the number was expected to be on the higher side, it was not expected to jump to this level, analysts said.

October 13, 2020 / 01:40 PM IST

India's September retail inflation print came on a surprising note, raising concerns on the scope of keeping key lending rates low by the Reserve Bank of India (RBI).

September retail inflation rose to 7.34 percent due to higher food prices, as per the data released by the National Statistical Office (NSO) on October 12.

A CNBC-TV18 poll had estimated September CPI print at 6.9 percent.

The inflation based on the Consumer Price Index (CPI) stood at 6.69 percent in August. It was 3.99 percent in September of last year.

The rate of price rise in the food basket was 10.68 percent in September compared to 9.05 percent in August.

While the number was expected to be on the higher side, it was not expected to jump to this level, analysts said.

"The CPI print for September came as a bit of surprise with overall CPI and CPFI having shot up further to 7.3 percent and 10.7 percent, respectively," said Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research.

Higher inflation prints are a matter of worry for the economy as well as the market, for it will cripple RBI's ability to keep rates lower for a longer time, which is needed considering the magnitude of pain COVID-19 has inflicted to the economy.

The market has been rising on liquidity boost and low-interest rates across the globe.

What now?

The RBI mainly factors in retail inflation while deciding on the key interest rate.

In the last policy meet on October 9, the RBI kept policy rates on hold in a unanimous decision and said inflation would remain elevated in the September print but ease gradually towards the target over Q3 and Q4.

"Our analysis suggests that supply disruptions and associated margins/mark-ups are the major factors driving up inflation. As supply chains are restored, these wedges should dissipate," RBI Governor Shaktikanta Das had said.

Rahul Bajoria, Chief India Economist at Barclays India said CPI inflation surprised materially to the upside in September, at 7.34 percent, as sticky prices for food combined kept pressure on headline CPI.

"While it is unlikely the MPC had much sense of today’s print, we think an elevated inflation profile for longer will make it harder to maintain the policy mix disproportionately in favour of supporting growth, especially as price pressures are likely to persist as the economy stages a base-led recovery next year," Bajoria said.

"Absent a major food supply intervention, it is looking likely that CPI inflation could be closer to 6 percent by end-March 2021, which may pose risks to any future cuts. But we still expect a cut in February 2021 MPC," Bajoria added.

What adds to worry is the fact that the expectation that due to normal monsoon and unlocking of the economy, inflation will ease has been dashed.

"This inflation print is contrary to the market expectations that with the unlocking of the economy and the easing of the supply constraints, the food prices will moderate over the next few months. Clearly, the supply constraints continue to exist despite a favourable monsoon and good agricultural production as reflected in the higher double-digit inflation in not only protein items but also vegetables and spices," Chowdhury said.

Chowdhury underscored that the concerns on the threat of stagflation appear to be getting stronger and while the RBI has communicated its decision on continuing with an accommodative environment well into the next fiscal, such increasing levels of inflation will clearly be a concern for the policymakers.

"In our opinion, management of bond yields may prove to be seriously challenging in such an inflationary and fiscal environment," Chowdhury said.

Nish Bhatt, Founder & CEO, Millwood Kane International also agrees that the September inflation data is above most estimates.

"The rise in the retail inflation data for the month of September rising above 7 percent, food inflation above 10 percent due to supply constraints is a worry. This is the sixth straight month that retail inflation has been above the 6 percent mark," Bhatt pointed out.

Bhatt believes the rise in inflation will affect RBI's ability to act on rates as it would like to see it dropping below the 6 percent mark on a durable basis before taking a decision.

But the RBI will still maintain its accommodative stance even though it may cut the rates.

"The RBI is likely to maintain its accommodative stance despite a spike in headline inflation. We believe that the central bank will not cut rates. However, the RBI is likely to continue to infuse liquidity through OMOs and TLTROs which is likely to keep a tab on yields and the spreads," said brokerage firm Emkay Global.

Brokerage firm Kotak Institutional Equities said while a rate cut in the December policy seems extremely unlikely, the recent inflation print casts doubt on the chances of any rate cut in the February policy as well, given that inflation is seemingly higher than the MPC’s recent projections for Q2FY21.

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Nishant Kumar
first published: Oct 13, 2020 09:26 am