Retail inflation rises to 5-year high of 7.35% while economic growth is on decline
New Delhi/Hyderabad: Retail inflation has sharply risen to over five-and-half-year high of 7.35 per cent in December from 5.54 per cent in November, following a significant surge in food prices and hike in telecom tariffs.
Retail inflation — officially called the Consumer Price Index — has breached the Reserve Bank of India’s tolerance level of six per cent and could deny space for the central bank to slash interest rates to boost sagging economic growth in February. According to the inflation mandate given by the government, the RBI was required to keep inflation at four per cent, plus or minus two percentage points.
This is the highest retail inflation witnessed during the Narendra Modi government since 2014.
Higher inflation, coupled with lower economic growth and higher unemployment, has pushed India into an avoidable stagflation situation after six years. Though the Indian economy exhibits all the three features that define stagflation, most economists were reluctant to go on record by announcing the onset of stagflation.
Retail inflation had spiked in December because of higher food inflation, which was at 14.22 per cent. Food inflation shot up because of costly vegetables, whose prices rose by 60 per cent and pulses, which became 15 per cent costlier.
Economists, however, opine that food inflation would continue to be elevated in the next few months because of shortage in pulses even when vegetable prices head south. “Consumer Price Index (CPI) at 7.5% broke the ceiling going beyond the RBI tolerance limit of six per cent, fully reflecting the recent uptrend in food prices. While fruit and vegetable prices may come down as these crops have short cultivation cycles, the rise in prices of pulses may stay on for more time,” said Mr Joseph Thomas, head of research, Emkay Wealth Management.
“In particular, prices of pulses may remain elevated in the coming months, despite the favourable outlook for the rabi crop. Stickiness in prices of protein items may provide a floor to food inflation going forward, even once vegetable prices correct to seasonally appropriate levels,” said Ms Aditi Nayar, principal economist, ICRA.
A. Prasanna, economist, ICICI Securities, primary dealership, feels that higher inflation could also increase yields (return) on Indian bonds marginally on Tuesday, unless the government comes to the support in the market. A higher yield for bonds increases cost of overseas borrowing for Indian entities.
