India’s December CPI inflation extends gains, RBI likely to stay on hold

NEW DELHI -  India’s December 2015 CPI inflation out-turn extended recent gains since hitting an eight- month low in August, limiting room for the Reserve Bank of India to exercise interest rate cuts later this year, according to BBVA Bank.

The latest CPI numbers edged up to 5.6% y/y compared to 5.4% y/y in November, led mainly by a low base effect from last year and a sharper than expected pick-up in food inflation (46% weight in CPI), particularly beverages, meat, fish and oils. Core inflation, which excludes food and fuel, picked up marginally as well, up 4.5% y/y from 4.3% previously, on the back of price increases across housing and health.

For the full calendar year 2015, India’s average headline CPI inflation stood at 4.9%. an improvement from 6.5% in 2014 and is expected to be stable at 5.2% in 2016, BBVA says.

“Looking ahead, we think risks to India’s inflation remain balanced. Key factors stoking inflation pressure ahead are the El Nino effect on winter crops and the impact of the proposed 24% hike in total pay, allowances and pensions of Central government employees.

“On the flipside, factors such as wilting global oil and commodity prices, weak rural wage growth, industrial capacity under[utilisation and weak momentum in investment demand, and a waning unfavourable base effect, are expected to weigh on inflation.”

BBVA expects 25 to 50 basis points policy rate cuts in FY17.  www.bbvaresearch.com (ATI).