November inflation print may have peaked

Barclays India said in a report. Favourable base effects, improving supply constraints and a small reversal in food prices will likely have a moderating effect on CPI inflation over coming months, it said.

In its estimation, inflation will remain elevated at 7.2% in November, the tenth above-target reading this year, though lower than October’s 77-month high.

“In November, we see scope for greater consolidation in food prices, especially in perishables,” said Rahul Bajoria, Chief India Economist, Barclays. “Key vegetables prices, such as potatoes, tomatoes and onion appear to have peaked, and have started falling at the margin. With this year’s bumper grain harvest hitting markets, prices of cereals should also retrace, along with egg prices which had risen sharply in last 3 months.”

However, price of pulses, spices and cooking oil are likely to be higher at the margin. Overall, Barclays expects food inflation to decline moderately to 9.2% from 10.2% in October.

Cooking-gas prices remain flattish, while motor-fuel prices were marginally higher amid a slight move up in international crude oil prices, the Barclays report said. As a mitigating factor, gold prices are likely to moderate slightly amid falling international prices, while some persistent increase in health and education prices will keep core CPI sticky at 5.60%. However, core inflation could slow over the next 6-12 months, reflecting subdued underlying demand.

The RBI which stayed pat on key policy repo rate raised its CPI projection in the recently concluded policy. CPI inflation projection for the first half of next fiscal is raised to a range of 5.2 to 4.6 % from 4.3% forecast for the first fiscal quarter.

“Inflation is likely to remain elevated, with some relief in the winter months from prices of perishables and bumper kharif arrivals,” RBI Governor Shaktikanta Das said last week. “This constrains monetary policy at the current juncture from using the space available to act in support of growth.’’

The inflation rate is likely to remain somewhat sticky over the next six months despite the moderation in food prices, Bajoria of Barclays said. First, favourable base effects would lower food prices in the next 2-3 months, beyond which, food inflation may start climbing again. Import price pressures are likely to also be somewhat manageable, with falling gold prices mitigating the rise in oil at the margin.

Although perishable-food price pressures appear to have peaked and should start to have a greater downward impact on inflation, we think several factors, such as higher operational and labour costs, will likely prevent a large drop in inflation over the next three to six months.