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Macroscope – Inflation CPI Inflation For The Month December 2020

Written by - Tejesh Kumar

January 13, 2021 3 minutes

What is the latest reading?

India’s retail inflation eased for 2nd straight month after touching its highest figures in last 6 years in Oct’20. Inflation came in at 4.59% in December vs 6.93% in November, with it coming in-line with RBI tolerance level after staying above it for 8 consecutive months. Core CPI eased to 5.34% after rising to highest in ~2 years at 5.51% in the month prior.

macro

Inflation in December is at its lowest levels in last 15 months, falling in-line with MPC’s tolerance band of 4 (+/-2)%, for the 1st time since pandemic inception. With inflation reducing & IIP contracting, country macros send mixed signal with sustainability continuing to be a faltering feel.

Element Inflations

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Investor Takeaway

The fall in inflation can be credited to fall witnessed in vegetable prices which slipped 10.4% YoY vs uptick of 15.6% in month prior.

High base-effect came into play too in seeing inflation picture a softer print. The base play can misguide real inflation figures in H1CY2021, courtesy of extraordinary inflation seen in comparison figures.

The continued downtrend in veggie prices were countered with broad-base increase in other food items. The after-effect of unlockings has translated into higher oil prices as prices follow an upward trajectory, thus posing as risk to inflation metric in coming times.

Correction in prices of sub-indices under the Greens category helped deflate stepper inflation values.

As pressures on perishable food prices ready for a go on the downside, other factors such as increased input and output costs, higher labor charges and rising oil prices can dampen hopes of drop in inflation in coming times.

Core-inflation is expected to chart a similar trajectory as demand-side factors continue to battle the covid brunt.

In last bi-monthly monetary policy meeting, the central bank kept its key interest rates unchanged while maintaining its accommodative stance. Continuing to focus on growth via polices and packages, RBI is to use an arsenal of unique liquidity and similar supportive strategies to maintain current pace of expedited growth.

Broad-based domestic and global economic recovery should improve aggregate demand, posing an upside risk to inflation. Favorable base effect, appreciating rupee and any risk of second or third wave of covid led slowdown, will be a tailwind for CPI inflation.

It is likely for RBI to remain on pause in February meet and consider rate-cutsin near future after efficacy in transmission of prior rate-cuts.

Click here If you want to read the complete CPI Inflation press release

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