India’s consumer price inflation eases further in November, RBI likely to cut rate by 25bps in Q1 2017

India’s consumer prices continued to stay subdued in November because of weak food prices. Consumer price inflation of India slowed to 3.63 percent year-on-year in November, owing to the drops in prices of food. The downward surprise was mainly because of fruits and vegetables, noted ANZ in a research report.

Meanwhile, cereals prices strengthened on a sequential basis. The near-term inflation outlook stays comfortable because of a sharp fall in household inflation expectations in November, the government’s demonetisation move that would hurt discretionary spending on goods and services, and sound progress of winter crop sowing.

“We continue to expect the RBI to meet their inflation target of 5 percent for Q4 FY2017, ie Q1 of calendar year 2017”, said ANZ.

In spite of the comfortable headline inflation print, the persistence of the core inflation trajectory has to be concerned about. Core inflation stayed sticky in November because of increased transport costs that counter a slowdown in goods and services inflation. The downward inflexibility in core inflation would probably give rigidity to headline inflation, according to ANZ. Also, the increase in crude prices after OPEC’s decision to reduce output poses upside risk to the outlook of inflation.

The Reserve Bank of India is expected to make a final 25 basis points rate reduction in the fourth quarter of FY2017 after staying put in December. As such, the stickiness in core pressures, along with the reversal of base effects in March 2017 would restrict monetary space to underpin waning investment, added ANZ.