People stand in a line in Dhaka to buy onions, with prices having recently shot up, November 14 2019. Picture: AFP/MUNIR UZ ZAMAN
People stand in a line in Dhaka to buy onions, with prices having recently shot up, November 14 2019. Picture: AFP/MUNIR UZ ZAMAN

Mumbai — India’s headline inflation pierced the central bank’s 4% medium-term threshold in October, but the onion price-driven surge is unlikely to distract monetary policy makers from their focus on growth.

Consumer prices rose 4.62% in October from a year earlier, the statistics ministry said in a statement on Wednesday. That is higher than the 4.35% median estimate in a Bloomberg survey of 34 economists and the first print above 4% since July 2018 and the highest since June 2018.

While the Reserve Bank of India (RBI) will assess the accompanying food-price data, it may not be compelling enough to hold its attention: underlying inflation — a measure of demand in the economy — was benign at 3.4%, the softest pace in the new data series going back to 2014. First indications came via purchasing managers surveys, which signaled weak manufacturing and services activity in October.

Core inflation “has collapsed” due to a broad-based weakness in demand, said Rupa Rege Nitsure, group chief economist at L&T Financial Services in Mumbai. “India needs to focus on growth and arrest the deflationary trends.”

An overwhelming majority of data has pointed to continued weakness in the economy that expanded 5% in the quarter ended June — the slowest pace in six years. The slump gives members of the RIA’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.

“Future rate cut may be less aggressive accompanied with lack of unanimity about the rate cut path,” said Shubhada Rao, chief economist at Yes Bank in Mumbai.

With the RBI already cutting interest rates five times in 2019, by a cumulative 135 basis points to 5.15%, economists expect the rate to fall further to 4.9% by the end of March 2020.

“We expect the RBI to maintain its easing bias on the back of sluggish growth, and weak generalised inflation pressures,” Teresa John, an economist at Nirmal Bang Equities, said before the release of the data. While John expects a 15 basis-point cut at the next policy meeting in December, she didn’t rule out a large cut should growth numbers “surprise substantially on the downside below 5%”.

GDP data for the three months to September is due on November 29 and will probably show a mild recovery in growth to 5.5%. 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 stabilise, while forecasting headline inflation to stay well below its medium-term target of 4% for the rest of the fiscal year to the end of March 2020.

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 November 15 and December 15.

Bloomberg Economics’ Abhishek Gupta said the elevated readings will 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.” 

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

“The probability is rising that the RBI might wait to get a better sense of the inflationary trajectory,” said Kunal Kundu, an analyst at Société Générale in Bengaluru. “The easing cycle has not ended as RBI would be expected to do the heavy lifting for the economy in the absence of fiscal space for pump priming the economy.”

With Tomoko Sato

Bloomberg