India retail inflation eases to 3-month low but no rate cuts expected yet

NEW DELHI: India's retail inflation rate touched a three-month low of 5.10 percent in January as prices of some food items rose more slowly, data showed on Monday, although the central bank is expected to wait before cutting rates as inflation remains above its target rate.

Annual retail inflation, opens new tab eased in January from 5.69 percent in December, government data showed, and was in line with a 5.09 percent forecast by a Reuters poll of 44 economists.

Last week, Reserve Bank of India (RBI) left interest rates unchanged, signalling that cuts may be some time away as it focuses on getting inflation to 4 percent on a sustainable basis.

Food inflation, which accounts for nearly half of the overall consumer price basket, rose 8.30 percent in January, compared with a 9.53 percent rise in December.

Prices of cereals rose 7.83 percent year-on-year in January compared to 9.93 percent in the previous month, while vegetable prices rose 27.03 percent compared to 27.64 percent in December, the data showed.

"CPI inflation came in slightly softer than our expectations," said Upasna Bhardwaj, chief economist at Mumbai-based Kotak Mahindra Bank. But uncertainties about food inflation are likely to keep the central bank "cautious in the near term", she said.

The central bank forecasts retail inflation at an average of 5.4 percent in the current fiscal year ending in March, and at 4.5 percent for the next fiscal year.

Core inflation, which strips out volatile food and energy prices, is estimated at 3.6 percent in January, compared with 3.8 percent-3.89 percent in December, according to two economists.

"Housing inflation remains weaker than expected, despite strong urban demand," said Gaura Sen Gupta, economist at IDFC First Bank. The Indian government does not release core inflation figures.

Core inflation has fallen despite strong growth in the economy. India posted faster-than-expected economic growth of 7.6 percent in the July-September quarter compared to a year earlier, after growing 7.8 percent in the previous quarter. The government forecasts annual growth of 7.3 percent in the fiscal year ending in March.

VOLATILE FOOD PRICES

Food price shocks have been the main driver of inflation in the past year, due to climate vagaries and supply shocks due to geopolitical tensions.

Last week, the RBI said large and repetitive food price shocks were interrupting the pace of disinflation.

India lowered the stock limit of wheat that traders can hold to increase the grain's availability and moderate prices. It has banned exports of wheat, some grades of rice and onions to contain inflation.

Some economists expect moderating food prices could help ease pressure on retail inflation. "Price pressures are easing in earnest, and we think rate cuts will come onto the agenda in the second half of the year," Shilan Shah, deputy chief emerging markets economist at Capital Economics, said.