Economy

Rising onion prices fuelling inflation not rates

Bloomberg Mumbai | Updated on November 13, 2019 Published on November 13, 2019

The inflation-targeting RBI expects food prices to stabilize while forecasting headline inflation to stay well below its medium-term target of 4 per cent for the rest of the fiscal year through March.

With the RBI already cutting rates five times this year, by a cumulative 135 basis points to 5.15 per cent, economists expect the rate to fall further to 4.9 per cent by the end of March 2020.

India’s headline inflation probably breached the central banks 4 per cent medium-term threshold last month, but that surge -- driven by high onion prices -- is unlikely to distract monetary policy makers from their focus on growth.

Economists pegged the gains in consumer prices at 4.35 per cent in October, according to the median of 33 economists surveyed by Bloomberg. That would be the first above-4 per cent print since July 2018 and the highest since June last year.

While policy makers will assess the accompanying food-price data, it may not be compelling enough to hold their attention: underlying inflation -- a measure of demand in the economy -- is expected to remain subdued. First indications came via purchasing managers surveys, which signalled weak manufacturing and services activity in October.

An overwhelming majority of data have pointed to continued weakness in the economy that expanded 5 per cent in the quarter ended June -- the slowest pace in six years. The slump gives members of the Reserve Bank of India’s Monetary Policy Committee reason to stick with their accommodative policy stance, although room for a deep cut may be limited given the rebound in headline inflation.

With the RBI already cutting interest rates five times this year, by a cumulative 135 basis points to 5.15 per cent, economists expect the rate to fall further to 4.9 per cent by the end of March 2020.

We expect the RBI to maintain its easing bias on the back of sluggish growth, and weak generalized inflation pressures, said Teresa John, an economist at Nirmal Bang Equities Pvt., who sees a 15 basis-point cut at the next policy meeting in December. Should growth numbers surprise substantially on the downside below 5 per cent, we would not rule out a significant rate cut.

Gross domestic product data for the three months to September is due Nov. 29 and will probably show a mild recovery in growth to 5.5 per cent. Economists, however, say the main reason for that may be more because of a favourable base effect.

Onion Imports

The inflation-targeting RBI expects food prices to stabilize while forecasting headline inflation to stay well below its medium-term target of 4 per cent for the rest of the fiscal year through March.

India’s government moved to control prices of onions by importing 100,000 tonnes of the vegetable, Food and Consumer Affairs Minister Ram Vilas Paswan said via Twitter. The kitchen staple will be available for distribution in local markets between Nov. 15 to Dec. 15.

Bloomberg Economics Abhishek Gupta said the elevated readings would not last long enough with plentiful rains bolstering farm output and keeping a lid on prices. However, worries about slowing growth will keep alive expectations of more monetary stimulus.

A widening output gap continues to sap underlying inflation pressures, with the core gauge set to ease further below target -- allowing room for further monetary stimulus to spur growth, he said.

On Monday, data showed industrial production contracted 4.3 per cent in September, the steepest decline in eight years. That follows output in the nations core infrastructure industries shrinking to the lowest since at least 2005, amid a prolonged economic slowdown.

The poor data prompted some economists to cut their forecasts for GDP growth for the three months to September.

Growth may cool to 4.2 per cent during the quarter, according to Soumya Kanti Ghosh, chief economic adviser at the State Bank of India, the country’s largest commercial bank. He lowered the GDP forecast for the full-year ending March 2020 to 5 per cent from 6.1 per cent earlier.

Published on November 13, 2019
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