Indian headline inflation accelerates year-on-year in December, RBI likely to stand pat in 2018

Indian consumer price inflation continued with its upward trend in December. The headline inflation accelerated to a 16-month high of 5.21 percent in December. A rise in prices of select food items supported the high CPI print. The statistical impact of an unfavorable base also rose the year-on-year print. The CPI, on a sequential basis, dropped 0.29 percent after rising 1.1 percent in the prior month.

Core inflation rose to 5 percent year-on-year in December from 4.82 percent in November because of a less than expected drop in housing inflation. However, other components of core CPI basket exhibited weak sequential momentum. This was because of a reduction in the Goods and Services Tax rates for many goods in November 2017. As such, core inflation ex-housing remained stable at 4.11 percent year-on-year in December.

“We expect demand pull pressures to remain capped amid moderate consumption demand. According to the advanced estimates of FY2018 GDP, consumption GDP is expected to ease to 6.0 percent in H2 FY2018 from 6.3 percent in H1 FY2018”, noted ANZ in a research report.

However, the consumer price inflation is expected to come in at 3.6 percent in FY2018 and it is likely to average 5.1 percent in FY2019. Meanwhile, the Reserve Bank of India is expected to maintain its policy repo rate at 6 percent this year in order to assist growth gain momentum. But the central bank’s rhetoric is expected to turn hawkish given that inflation is expected to move into the upper half of the central bank’s 2 percent to 6 percent band in 2018, added ANZ.

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