(Reuters) - India’s consumer prices rose at a faster pace than anticipated in March, but remained below the central bank’s target for an eighth straight month, increasing the chances for a key interest rate cut in June.
The annual retail inflation rate rose in March to 2.86 percent, from 2.57 percent in the previous month, government data showed on Friday.
Analysts polled by Reuters had forecast that India’s retail inflation will accelerate in March on slightly higher food prices but remain under the Reserve Bank of India’s medium-term target of 4 percent.
MADHAVI ARORA, LEAD ECONOMIST, EDELWEISS SECURITIES, FX AND RATES, MUMBAI
“The CPI inflation came in line with our expectations at 2.86 percent, however, the core inflation surprised pleasantly with a sharper-than-expected downtick. This is in line with the Reserve Bank of India’s (RBI) 4QFY19 inflation projections of 2.4 percent.
“Going ahead, while we see inflation averaging close to 3.9 percent for FY20 as against 3.4 percent in FY19, we do see several uncertainties that may cloud the inflation outlook. We are already seeing signs of sequential bottoming of food prices, while there could also be increased policy focus to correct food anomalies to favour agriculture terms of trade.
“Monsoon progress will also be pertinent. On the other hand, we continue to see core inflation component being high, averaging 4.9 percent in FY20 even as it likely moderated from 5.7 percent in FY19.
“On the policy implication front, we are in consonance with the RBI on near-term inflation dynamics and retain our call of another 25 bps cut in 1HFY20, most possibly in June itself, especially amid the current global Goldilocks situation. The bar for further cuts will be a much higher and will be data-dependent.”
ABHISHEK UPADHYAY, SENIOR ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI
“The inflation number is broadly in sync with what the RBI likely penciled in its revised projections laid out earlier this month, although somewhat lower than our forecast. Core inflation has eased 30bps over the month, and that is a positive. We do expect core inflation to ease more over April-June towards 4.5 percent, but continue to see key risks in food inflation.
“Wholesale food prices have gone up sharply in the recent months, and it is likely that retail prices will play catch-up. Key segments such as pulses as well as perishable food prices that are suppressed could lead the pick-up.
“We expect H2FY20 inflation to evolve 50-70 bps higher than the RBI’s forecasts. Given that there is a large uncertainty about election results and impact on markets, as well as lack of clarity over the fiscal stance, it would be prudent for the Monetary Policy Committee (MPC) to stay on a long pause. A repo rate of 6 percent can hardly be termed high, and banks are anyways struggling to raise deposit growth.”
RUPA REGE NITSURE, CHIEF ECONOMIST, L&T FINANCE HOLDING, MUMBAI
“That’s a very disappointing data showing a significant loss of growth momentum. This clearly means economic activity is slowing led by weakening demand.
“The overall consumer price index at 2.86 percent is primarily due to a year-on-year pick in fuel inflation and food inflation re-entering a positive zone, but food inflation is still very weak.
“Given the overall demand situation and good surpluses of food grains, I don’t think El Nino would lead to any significant spikes.
“The RBI has scope to manage sentiment through liquidity creation and rate-cuts. What is worrying is the reversal in production growth of capital goods, which signals a slowdown in investment demand.”
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
“Both the CPI and IIP numbers are largely on expected lines. It shows that growth slump is persisting with manufacturing being the worst-hit segment.
“Inflation, despite hardening, remains extremely benign as compared with the longer-term trend. So we expect the RBI to continue with neutral rate and accommodative liquidity stance. We expect 25-50 bps rate cut in 2019. However, after two successive cuts, the RBI may pause in the next policy.
“Food has high weight in CPI. So any adverse impact on agriculture output coupled with the already announced high MSPs can lead to a quick jump in CPI.
“The RBI has made it explicit that their inflation projections are under the assumption of normal monsoon. So in the event of an El Nino, the risk is substantial.”
“Though inflation inched up in March, it would remain well under the RBI’s comfort level of 4 percent despite possibility of below-normal monsoons.
“Apart from policy priorities of a new government, the rate cut decision is data-dependent and the data could remain benign.
“Growth slowdown driven by weakness in consumer demand would be an important factor influencing the RBI’s monetary stance.”
“Pick-up in March inflation was close to our expectations. The outcome validates the central bank’s move to be confident on a benign inflationary trend, but prefer to stay data-dependent as inflation is expected to grind higher after hitting bottom in January 2019.
“After a neutral cut in April, the door is still open for late-cycle easing in June or August. Oil prices and monsoon strength are two factors that are likely to be watched closely.”
“A modest rise in inflation was on the cards. Some sequential pick-up in food is expected in the summer months. What’s comforting is that inflation still remains within the targeted range of the Reserve Bank of India, and is in line with the trajectory outlined by the central bank. We expect one more rate cut by the RBI this year.
“However, oil prices, fiscal math of the new government and food trajectory during the summer months are some unknown variables and the MPC would like to wait for some time to gain more clarity on these factors before making its next move.”
“While food prices were expectedly a key driver of the uptick in March headline inflation, they still remain benign relative to historical standard.
“The impact of El Nino on monsoon and food prices is a risk going forward though it is too early to worry about it as not all El Nino years have led to a spike in inflation in the past.
“The central bank will also focus on aiding growth amid downside risks especially weak global demand.”
Reporting by Krishna V Kurup, Chandini Monnappa, Chris Thomas in Bengaluru; Suvashree Dey Choudhury and Abhirup Roy in Mumbai, Editing by Sherry Jacob-Phillips