Inflation reins, but RBI to remain on the sidelines: Barclays

Inflation reins, but RBI to remain on the sidelines: Barclays

Consumer price index (CPI) inflation has moderated to be within RBI’s target bank rising by 4.59 per cent in December largely driven by fall in food prices. But the Reserve Bank of India is not expected to revise its policy rate either way, according to Barclays India.

Looking at the details, the prices of vegetables appear to have fallen across the board, alongside lower prices for milk, pulses, and cereals. We are seeing more signs that prices of key perishable vegetables continue to correct, and this will likely be a key disinflationary source in January as well, along with meat prices, which will likely correct lower given fears of avian flu.

However, some of the increase is likely to be mitigated by rising cooking oil, milk, and processed food prices, which appear to be rising on a sustained basis.

Rising oil prices remain a key risk for inflation over the medium term, Barclays said. Besides, retail prices face a considerable pressure from government tax levies. With fiscal resources contained, policymakers may find it tough to cut taxes on motor fuels. In absence of tax tweaks, $10 per barrel rise in crude prices could lead to a 34 bps (one bps is 0.01 per cent) increase in CPI.

Although inflation is now back within the central bank’s target band, but today’s numbers is likely to drive a reduction in the RBI’s inflation profile, at least for first quarter of 2021. Barclays estimates CPI inflation to average closer to 5.0% in January-March quarter this year, versus the RBI’s own projection of 5.8%, taking average FY’21 inflation to 6.2% (previously: 6.6%).

“In such a scenario, monetary policymakers might opt to look through the part- base effect driven, temporary moderation in consumer prices” said Rahul Bajoria Balrclays’ India economist. Even with its announced withdrawal of liquidity, RBI may not signal 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 2021. The benchmark repo rate at 4 per cent and has been lowered by 115bps to revive the economy since March 2020 when the government announced a nation-wide lockdown in wake of the COVID pandemic which brought the economy to a virtual standstill.

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