India’s pace of inflation slowed markedly in December, falling within the central bank's target for the first time since the coronavirus pandemic began last year.
The consumer price index recorded an annual growth rate of 4.6 per cent in the final month of 2020, down from 6.9 per cent in November, largely due to a slowdown in the increasing cost of everyday food staples such as onions and potatoes. The drop was larger than analysts surveyed by Reuters had expected.
The data came as a relief to the Reserve Bank of India, which is mandated to keep inflation below 6 per cent and had not cut its repo rate since May due to concerns about the sustained rise in prices.
This, combined with India’s severe economic contraction, prompted concerns that the country was becoming stuck in a cycle of stagflation. Retail inflation peaked in October at a multiyear high of 7.6 per cent.
“High inflation has been an inconvenient thorn in the side of the RBI,” said Aurodeep Nandi, an economist at Nomura based in Mumbai. “To that extent, the correction in the inflation trajectory bodes well and offers it some breathing space. But inflationary pressures haven’t evaporated.”
India’s gross domestic product is expected to shrink 7.7 per cent in the year to the end of March, according to government statisticians.
The combination of a contracting economy and rising inflation has piled pressure on low-income Indians, millions of whom lost work or wages during the pandemic and the resulting lockdown and struggled to afford basic foodstuffs such as vegetables and pulses.
The easing in the pace of vegetable price increases is partly due to the resolution of supply chain disruptions following the lockdown. India’s food price index fell from 166 in November to 160.6 in December, according to the statistics ministry.
Prices for onions and potatoes arriving at the large Azadpur market in the Indian capital New Delhi fell sharply in December, according to an analysis by the Hindustan Times newspaper.
India was one of the countries hardest hit by coronavirus, recording the world’s second-highest Covid-19 caseload at more than 10m. But new daily cases dropped sharply in the latter months of 2020, while the economy has shown signs of improvement.
Consumer demand and business activity indicators have picked up, though the recovery remains in its early stages and tentative.
Industrial production contracted 1.9 per cent in November compared with a year earlier, according to government data released on Tuesday, down from an increase in the previous month. Manufacturing and mining output shrank.
At its monetary policy meeting in December, the RBI cited the “adverse” outlook for inflation as an obstacle to further cuts but said it would maintain an accommodative stance in the months to come. The RBI committee is due to meet again in early February.
“We think that the latest fall in inflation could be enough for the RBI to resume its rate-cutting cycle,” said research firm Capital Economics in a note. “The economy remains weak, even allowing for the recent rebound.”
However, Mr Nandi thinks the RBI will hold off on further cuts for now. “I don’t think this is enough for the RBI to lower its guard,” he said.