What is your quick take on the India inflation number for the month of Jan-22?
Answer
Answer
With the US inflation for Jan-22 at 40-year highs of 7.5%, India inflation was expected to be around the 6% mark. So not really much of a surprise at 6.01% inflation in Jan-22. However, this inflation number for Jan-22 is above the RBI outer tolerance limit of 6%. Here are some key points in the inflation debate.
· CPI inflation for Jan-22 at 6.01% was a return to above 6% after a gap of 7 months. Incidentally, this is the 28th successive month that retail inflation stayed above the RBI median target of 4%. The target is still 4% and there is a 2% leeway either ways.
· While food inflation is sharply higher in the last 2 months, it is core inflation or residual inflation that RBI would worry about. That is because, it excludes cyclical items like food and fuel. Hence core inflation is stickier compared to food and fuel and hard to control.
· Core inflation for Jan-22 at 6.21% was the fourth successive month when core inflation stayed above 6%, which is not a good signal. In 7 out of the last 12 months, core inflation has been above the 6% mark. This is largely due to supply side constraints. The table captures food inflation and core inflation over last 1 year.
Month
Food Inflation (%)
Core Inflation (%)
Jan-21
1.96%
5.65%
Feb-21
3.87%
5.89%
Mar-21
4.94%
6.00%
Apr-21
1.96%
5.38%
May-21
5.01%
6.40%
Jun-21
5.15%
6.11%
Jul-21
3.96%
5.93%
Aug-21
3.11%
5.77%
Sep-21
0.68%
5.76%
Oct-21
0.85%
6.06%
Nov-21
1.87%
6.08%
Dec-21
4.05%
6.02%
Jan-22
5.43%
6.21%
· Ironically, while oil is excluded from core inflation, the spill over downstream effect of oil is there on core inflation. Despite cuts in excise duties and VAT on oil, that has been neutralized by crude at $96/bbl. This has a downstream impact on core inflation.
What does this inflation data mean for future RBI policy? The Monetary Policy Committee (MPC) may have fended off rate hikes in Feb-22 policy, but it would be a lot tougher to fend off rate hikes in April 2022. It will not only depend on domestic prices and crude but a lot will also depend on what the US Fed does in March 2022. Let us understand why the RBI may continue to face pressure on the rates front.
Core inflation at 6.21% means government will have to urgently act to regulate supply chain issues. The flip side is that such measures impact revenue flows as in the case of cess on oil or import duties on palm oil. Secondly, with 85% reliance on imported crude, Brent crude at $96/bbl is the big risk; not only to the inflation number, but also to the Indian rupee.
In a nutshell, a lot will now predicate on the Mar-22 Fed meeting of the Fed. If the Fed guides for 175-200 bps rate hikes in calendar 2022 (which looks unlikely from the minutes), RBI may have no choice but to hike rates to protect flows. The reality is that RBI cannot really put off the rate hike decision for too long now.