India’s retail inflation likely stayed above 7 per cent for a second straight month in October as supply distortions led to a surge in vegetable prices, especially of onions, a Reuters poll showed, lowering the chances of further interest rate cuts. Disruption from by the coronavirus pandemic and excessive rainfall in states such as Maharashtra, Karnataka and Andhra Pradesh have damaged and delayed the harvesting of onions – a key ingredient in Indian kitchens – alongside other vegetables. A Reuters poll of 50 economists conducted from Nov. 4-9 predicted consumer prices rose 7.30 per cent last month from a year earlier, a touch lower than September’s 7.34 per cent rate.
If realised, it would be above the top end of the Reserve Bank of India’s medium-term target range of 2 per cent-6 per cent for the seventh consecutive month, a streak not seen since August 2014. “India’s recent inflation trajectory is driven by a confluence of seasonal supply-side drivers lifting the food segment, magnified by COVID-19-led disruptions, hindering inter-state transfer as well as provision of general services,” said Radhika Rao, economist at DBS Bank. “Price and tax rigidity in commodities has also added to the boost.”
Demand remains weak in Asia’s third-largest economy, which contracted at the sharpest pace on record of 23.9 per cent in the April-June quarter, as the ongoing pandemic left millions unemployed and resulted in massive pay cuts. India has the second-highest total infections in the world at more than 8.5 million cases.
The poll also predicted industrial output in September dropped 2.0 per cent from a year earlier, the seventh consecutive month of falls and its longest streak of decline since June 2009, as infrastructure output, which accounts for about 40 per cent of total industrial production, contracted 0.8 per cent.
Still, the RBI, which has eased its key repo rate by 115 basis points since March, was widely expected to wait until February before cutting the rate again amid worries over higher inflation.
“We see a space for a rate cut in the February policy meeting as the RBI leans towards stimulating growth and acts at the first window it gets when inflation drops within its target range,” said Sakshi Gupta, senior economist at HDFC Bank. “That said, we think the RBI is towards the end of its rate cutting cycle and there could be a prolonged pause as inflation concerns linger on.”
