India’s consumer price index at 77-month peak in October 2020

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Retail inflation rate in India surged to a 77-month high of 7.61 per cent last month in October. Food inflation spiked to 11.07 per cent in October, against 10.68 per cent in the previous month, remaining the biggest driver of the Consumer Price Index (CPI).

Even core retail inflation has risen from about 4 per cent in March to 5.7 per cent in October. Last month, core inflation rose by about 20 basis points from the September level, mainly due to elevated pressure from clothing and footwear, housing, health, and recreation and amusement.

Industrial production, meanwhile, rose 0.2 per cent year-on-year in September, the first growth since February and compared with a 7.4 per cent contraction in the previous month. The growth, however, is aided by a favourable base effect. IIP had contracted by as much as 4.6 per cent in September last year.

Capital goods output shrank for 21 months in a row in September, reflecting gloomy investment climate, although the level of contraction has narrowed to just 3.3 per cent from 14.8 per cent in August. Consumer durables rose by 2.8 per cent y-o-y in September, the first rise after 15th straight month of contraction, in the build-up to the festival season.

But what adds to the policymakers’ woes is the stubbornness of retail inflation. It has remained above the MPC’s (Monetary Policy Committee) tolerance band of 4 (+/-2) per cent for 10 of the past 11 months, despite Covid-induced demand compression in the economy.

While the government believes the spike is mainly caused by temporary supply-chain disruptions in the wake of the pandemic, the RBI  pointed out a possible generalisation of inflation.

“While a base effect and some softening in vegetable prices may pull down the CPI inflation in the ongoing month, it is expected to recede below 6 per cent only in December 2020. With the level of the headline and core CPI inflation, and the internal dynamics in October 2020 remaining worrying, a rate cut in the December 2020 policy meeting appears to be ruled out,” ICRA‘s Principal Economist Aditi Nayar said.

Even the likelihood of a repo rate cut in February 2021 seems rather low at this juncture, she added.

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