New Delhi [India], January 12 (ANI): India’s retail inflation, as measured by the Consumer Price Index (CPI), rose to a three-month high of 1.33 per cent in December 2023, according to data released on Friday. This uptick has sparked debate among economists regarding the potential for a rate cut by the Reserve Bank of India (RBI) in February.
The CPI inflation in November 2023 was 0.88 per cent, and in December 2022, it stood at 5.72 per cent. The latest figures indicate a significant base effect, with the year-on-year increase being more pronounced. Food inflation, a crucial component of CPI, witnessed a slight increase to 8.70 per cent in December from 8.7 per cent in the previous month.
Within the food basket, prices of vegetables saw a substantial rise of nearly 28 per cent. However, this increase was partially offset by a decline in prices of pulses and cereals. Fuel and light continued to experience deflation, with prices falling by 1.3 per cent year-on-year. Core inflation, which excludes volatile food and fuel prices, remained relatively stable.
The divergent views among economists stem from the interpretation of these figures. Some believe the recent rise in inflation is a temporary blip, primarily driven by vegetable prices, and that the RBI has room to cut interest rates in the upcoming February policy meeting to further stimulate economic growth. They point to the overall moderation in core inflation as a supportive factor.
RBI’s Stance
Others maintain a cautious stance, arguing that the persistence of food price pressures and potential global headwinds could lead to a broader inflationary trend. These economists suggest the RBI will likely adopt a wait-and-see approach, closely monitoring economic data before making any decisions on rate cuts.
“The December inflation print is unlikely to deter the RBI from its easing bias, but it will certainly delay the timing of rate cuts,” said Deepthi Mathew, an economist at HDFC Securities. “We expect the RBI to remain on hold in February and assess the impact of government measures to cool food prices before considering any rate adjustments.”
The government has already taken steps to address rising food prices, including releasing stocks of onions and imposing restrictions on exports of certain commodities. The effectiveness of these measures remains to be seen.
The RBI’s Monetary Policy Committee (MPC) is scheduled to meet in February to review the current economic situation and decide on its next course of action. The committee will carefully consider the latest inflation data alongside other indicators, such as GDP growth, employment levels, and global economic developments.
Market participants are keenly awaiting the MPC’s decision, as it will have significant implications for the Indian economy. A rate cut would likely boost investor sentiment and encourage borrowing, while a pause would indicate the RBI’s commitment to maintaining price stability. The current inflation reading adds another layer of complexity to the RBI’s policy dilemma.
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