Soaring food prices, especially vegetable, pulses, fish and meat, pushed the consumer price inflation index (CPI) inflation in December 2019 to a disturbing level of 7.35 per cent, the highest print since July 2014 when CPI hit 7.39 per cent.

Driven by the double-digit surge in food inflation at 14.12 per cent, the CPI inflation in December 2019 overshot the upper threshold of the Monetary Policy Committee’s band of 2-6 per cent by a significant margin.

This is the third straight month this fiscal when the CPI came in much above the RBI’s medium-term target of 4 per cent, official data released on Monday showed.

While retail inflation in November 2019 stood at 5.54 per cent (40 month high), the CPI for October was 4.62 per cent.

Food inflation — which has close to 50 per cent weightage in CPI index — rose to 14.12 per cent in December as against (-) 2.65 per cent in same month 2018. It was 10.01 per cent in November 2019. Vegetable prices rose 60.5 per cent in December 2019 on a year-on-year basis.

This worrisome news on retail inflation comes on top of recent downward slide in economic growth. The economy grew a modest 4.5 per cent in first half this fiscal. The Central Statistics Office recently pegged the advance estimate of GDP growth for 2019-20 at 5 per cent.

It may be recalled that the Reserve Bank of India had in its recent December policy review kept policy rates unchanged for the first time this year, on higher inflation expectations. The central bank has already conveyed its expectations that food inflation will remain high in the next six months. It had also revised the inflation projection from 3.5-3.7 per cent in the second half of 2019-20 to 4.7-5.1 per cent.

Core inflation was also up in December 2019 with rail freight rates and telecom rate increase feeding into this component.

RBI likely to pause

Most economists expect the RBI to take another pause on policy rates on February 6.

“Given that the fiscal picture will be known on February 1 and the revised numbers not on target, and with CPI inflation being above 4 per cent in the last three months and core inflation inching up, the RBI will take another pause on interest rates on February 6,” Madan Sabnavis, Chief Economist, CARE Ratings, told BusinessLine .

Aditi Nayar, Principal Economist, ICRA, said: “Even though we expect the headline CPI inflation to correct sharply in January and further in February, from the unpalatably high 7.35 per cent recorded in December 2019, it is expected to remain sticky above 4.3 per cent in the next few quarters.

Moreover, the concerns surrounding a higher core inflation trajectory are likely to be adequate for the MPC to remain on hold in its February 2020 policy review, along with a possible change in stance from accommodative to neutral”.

With an extended pause likely from the MPC over its next few meetings, the magnitude of further Twist OMOs and the market's expectations of the fiscal picture to be revealed in the upcoming Union Budget, will dominate the trend in bond yields in the rest of this month, she added.

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