India’s stubborn core inflation offers no room to move for RBI

NEW DELHI - India’s benchmark inflation indicator, the CPI, moderated in May to 8.3% y/y from 8.6% in April, led by a let up in food prices, which account for 50% of the CPI basket. However, core inflation was sticky at 7.7% y/y (7.7% previously) and suggests that demand side pressures, although contained, have not eased meaningfully so far, according to BBVA Bank.

“The latest CPI inflation outturn is broadly in line with RBI’s expected inflation trajectory. The Central bank left interest rates unchanged at 8.0% (repo) last week so as ‘to allow the disinflationary effects of rate increases undertaken during September 2013-January 2014 to mitigate inflationary pressures in the economy’,” BBVA said.
“RBI’s anti-inflationary stance and its adherence to an explicit ‘glide path’, which aims to reduce CPI inflation to 8% y/y by January 2015 and to 6% y/y by January 2016, is helping curb inflation expectations and rein in demand pressures. However, the pace of disinflation has been rather slow and food inflation is fraught with near term upside risk, given prospects of weak monsoon rains (July to September season) on account of El Nino effect.” www.bbvaresearch.com (ATI).