If We Exclude Vegetable Prices; CPI Inflation Remains In RBI's Range: UBI research

India's retail inflation rose to a 14-month high of 6.21 per cent in October, up from 5.49 per cent in August. On the back of rising vegetable prices, food inflation galloped and rose in double digits for the first time in fifteen months to 10.87 per cent from 9.2 per cent in the previous month, mainly due to a 42.18 per cent rise in vegetable prices.

A research report by the Union Bank says the spike in inflation is sharper than the MPC's estimate of 4.8 per cent, it is currently tracking above 5.5 per cent. It estimates a sharp correction in the fourth quarter and says if we remove vegetables the inflation is subdued at 3.6 per cent.

"In our view, with CPI ex veggies still relatively subdued at 3.6 per cent, the seasonal correction in veggie prices may be delayed with onion prices now on an upswing in November," said the Union bank report.

"We maintain our call of a shallow 50 bps rate cut cycle starting February 25 as highlighted in our MPC outcome report. Yet, in a volatile world, we need to embrace uncertainty and keep a close watch on Trump's policies which are likely to keep Dollar and rates elevated given upward pressure on both growth and inflation leading to repricing of Fed rate cut expectations," said the report.

Price of edible oil will also be a concern for the Reserve Bank of India (RBI). The recent hike in the import duty of refined palm oil, refined soy oil and refined sunflower oil to 35.75 per cent from 13.75 per cent from mid-September will add to inflationary pressure.

The incremental inflation contribution of oils to October CPI is almost 25 bps and the impact may persist for the next 12 months, noted the Union bank report.

The prices of cereals will be another pain point for the apex bank to contain inflation. The YoY inflation of cereals was broadly flat at 6.9 per cent on base effects, the MoM rise of 0.9 per cent will be a concern as cereals constitute 10 per cent weightage.

While on-the-ground cereals prices have started to correct, if we delve deeper into cereals sub-components, the inflation pressures are primarily led by the rise in rice PDS CPI even as that for wheat PDS CPI flattened out post 9.9 per cent MoM last month. This may be due to some recalibration by the government under the free food distribution scheme, the report added.

The report also highlights cereals under the Public distribution system (PDS) as a concern. “Meanwhile the PDS cereals CPI spike is unsustainable yet may lend an upward bias to food inflation levels. On balance, underlying food price pressures remain a cause for concern and need close watch," stated the report

The report also noted that while core inflation has seen a pick up from the lows of 3.1 per cent in June, it may continue in an upward trend in the coming months, but will broadly remain at comfortable levels. On analysis core CPI as per detailed sub-segment-wise classification shows that 90 per cent of the sub-segments are in the range of RBI's inflation targets.

"Interestingly, in October 24, if we analyse core CPI as per detailed sub-segment wise classification, almost 90 per cent of the 161 sub-segments are trending below the MPC's 4 per cent target. More importantly, most of the core CPI exclusion measures like core ex transport, core ex housing etc remain below the 4 per cent mark," said the report

The report also said that the recent hike in gold prices due has also added to the increase in core inflation.

"Gold prices have been the key driver of recent uptrend in core inflation driving personal care CPI to double-digits while all other broad sub-segments are in 2 to 4 per cent range. Gold prices also fell 5 per cent on November 24 on Dollar strength post Trump victory which may provide some inflation relief if sustained," said the report (ANI)