Money & Banking

DBS Group expects December CPI inflation to ease sharply to 5%

KR Srivats New Delhi | Updated on January 06, 2021

Says monetary policy committee may stay on a long pause

DBS Group Research does not see any material change to the inflation target when it comes up for review by the government in March 2021. The current CPI inflation target – 2 to 6 per cent range – centred around the mid point 4 per cent has been in effect since April 2016.

On the back of a near 19 per cent drop in vegetable prices on a month-on-month basis, Consumer Price Index (CPI) inflation is expected to slow to 5 per cent in December 2020, against 6.9 per cent recorded in the same month in the previous fiscal. However, the 2021 average inflation will stay above the 4 per cent target, said Radhika Rao, Economist, DBS Group Research, in a new report titled ‘India: Counting on Vaccine, Eye on Inflation’.

The report highlighted that the room for outright rate cuts by the RBI is limited, but the central bank will settle into a long pause, with a bias to anchor rates through strong dovish guidance.

A balancing act

The Reserve Bank of India (RBI) faces a balancing act this year, seeking to maintain a strong accommodative policy bias, notwithstanding incipient pressures. At the same time, it will seek to pare part of the pandemic-driven emergency response at an incremental pace.

CPI inflation remained elevated for a good part of 2020, with the wedge between CPI and WPI reinforcing the outsized role of supply-side disruptions .

In the near term, seasonal downdraft in food, base effects and remnant impact of sluggish demand may pull inflation sharply lower in December 2020 and early 2021, the report noted.

Taking a six-month view, while food eases, non-food might prove to be sticky, on account of rigidity in domestic fuel taxation, marginal hikes in manufacturing costs after months of shutdown, commodity price rises, telecom price adjustments, and return in demand impulses ( in certain core categories), the report added.

The recent rally in commodities lends to fresh cost-push impact, especially industrial metals (generic steel hot-rolled coil futures are up over 80 per cent since late September 2020) and oil (Brent up 30 per cent in Q4), and this warrants attention as it could put pressure on corporate margins and impinge on consumer purchasing power.

Vaccination programme

The report also highlighted that the lift to economic activity hinges on efficacy, deployment and timeliness of the vaccination programme. The Centre’s vaccine-related spending is likely to be mainly reflected in the FY22 Budget. By November 2020, the Ministry of Health and Family welfare had disbursed 74 per cent of the full-year expenditure of ₹ 67,100 crore against 66 per cent in the same time last year.

Published on January 06, 2021

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