According to the poll forecast, inflation is projected to have increased for the second consecutive month, surpassing the RBI’s 4% medium-term target throughout the October-December period.
According to estimates provided by 19 economists, India’s retail inflation is anticipated to have risen for the second consecutive month, reaching 5.9% in December 2023. This increase is largely attributed to an unfavorable base effect. The expected uptick follows a November print of 5.55% and is expected to bolster the Reserve Bank of India’s (RBI’s) decision to maintain the repo rate at 6.5% for the fifth consecutive month.
The projections from the poll indicate a range of 5.5% to 6.4%, with six economists foreseeing inflation to be at or above 6%, which is the upper tolerance limit of the RBI’s inflation targeting mandate.
The official data regarding retail inflation for December is scheduled to be released on 12 January.
Despite Softening Prices, Vegetable Inflation Continues to Boost Inflationary Pressure
“The expected pickup in inflation is mainly on account of higher vegetable inflation compared to the same month previous year, even as prices have started to soften sequentially,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
In December 2022, the vegetable index had declined 12.7% sequentially, while the prices in December 2023 are expected to have remained sharply higher despite the moderation from November.
Food Items and Inflation Trends
Food items, which account for nearly 40% of the inflation basket, had seen their inflation ease in the three months prior to November. However, it increased in November due to a sharp rise in vegetable prices. The central bank, too, in its latest policy meeting, warned of a pick-up in headline inflation in November-December due to uncertainties in food prices.
Inflation Projections and Analysis
If the poll prediction proves correct, inflation would have averaged 5.4% in the third quarter of fiscal year 2023-24, which is still lower than the RBI’s projection of 5.6%. Despite the pick-up in the year-on-year inflation rate in December, a few economists said that the rise in prices will be less pronounced compared with the last month.
Outlook and Expectations
A reversal in vegetable prices as well as a supportive base going forward is expected to cool the inflation prints to an average of 5% in the March-ending quarter, said Aditi Nayar, chief economist at ICRA Ltd. The RBI sees average inflation in this quarter at 5.2%. In this financial year, the central government has also taken supply-side measures to help keep food prices under control. While the central bank remains committed to aligning inflation to the target, it is widely expected to cut policy rates in 2024.
