India inflation cause for concern: Moody’s Analytics

By Angel Broking | Published on 31st March 2021 | 62

India inflation cause for concern: Moody’s Analytics

India’s inflation has been a cause for concern, according to a recent Moody’s Analytics report which says inflation is “above comfort levels” in India. The report also noted that Asian economies barring China have shown some sort of inflation-related worries.

Moody’s Analytics further noted that the rise in retail inflation to 5 per cent in February compared to 4.1 per cent in January had come as a challenge. The report titled ‘Macro Roundup: Is Inflation the Next Worry in Asia?” observed that increasing oil and food prices pushed the Consumer Price Index (CPI) of India to cross the 6 per cent upper level many times in 2020. This, the report added, had posed a tough challenge to the RBI, India’s central bank, as it had to ensure an accommodative stance.

Reports show that Brent crude has risen 26 per cent in 2021, at $64 per barrel as against $30 for a barrel in March last year.

CPI rises in February

India’s CPI or retail inflation rose to 5.03 per cent in February for the first time in three months because of an increase in food prices. The consumer food price index (CFPI) rose to 3.87 per cent, from 1.96per cent in January. The RBI has revised CPI inflation to 5.2 per cent for the January to March quarter this year. It has forecast CPI inflation to be in the 5.2 to 5.0 per cent range for the first half of FY22 and 4.3 per cent in the third quarter of FY22.

The CPI upper band had been breached constantly ever since June 2020 and stayed above 6 per cent. In September 2020, CPI inflation stood at 7.3 per cent, an eight-month high till then. Headline CPI fell steeply from the October 2020 percentage of 7.6 to a mere 4.1 per cent in January. Although it rose in February, the CPI has stayed below 6 per cent. In 2020, inflation surge was driven by prices of food while this year, non-food inflation has risen, owing to petrol and diesel taxes and increase in commodity prices.

MPC and inflation targets

As the financial year ends on March 31, the RBI Governor-led monetary policy committee (MPC) is expected to revise inflation targets. This is the first such revision since the RBI adopted a flexible model of inflation targeting in June 2016. The target for inflation thus far has been 4 per cent with a 2 per cent upper band for the first five years of the MPC, which ends today. The options in front of the government are to make small changes, to ensure flexibility in extraordinary situations. The current mandate is known as FIT (also known as inflation forecast targeting) needs the RBI to maintain inflation at the 4 per cent midpoint of its range. The 400 basis points framework that the RBI has is one of the biggest in Asia and is only equal to Turkey.

While growing inflation is indicative of greater demand and a quicker economic revival, too much of it can also impact the monetary policy committee decision-making. For instance, it may put the RBI in a position where it may have to increase interest rates, which it has not done so far and maintained an accommodative position. However, the expectation largely is that the RBI will maintain its current policy rates in the first review of the monetary policy scheduled in April. It is also expected that the RBI will maintain its current inflation target band beyond the end of the current financial year, ie, March 31.

As per Moody’s Analytics report, the only other Asian nation apart from India which has inflation-related concerns is the Philippines. The report also noted that Singapore, Malaysia and Hongkong saw a moderate rise in the level of inflation. On the other hand, China’s inflation has fallen for the third month in a row. While Hongkong’s headline CPI increased by 0.33 per cent year-on-year in February, Malaysia’s CPI inched up 0.1 per cent y-o-y. Singapore’s headline inflation went up 0.7 per cent. China’s CPI dropped by 0.2 per cent year-on-year in February following a 0.3 per cent drop the month before.

Conclusion

The latest Moody’s Analytics report says that India’s inflation is at an uncomfortably high level. While inflation is a sign of an economy opening up too much can also cause concern.

As the RBI is all set to announce its first MPC of the new fiscal on April 7, it is expected that the central bank will maintain the status quo and not increase interest rates because of inflation-related concerns.  The markets will be watching the data carefully and also the April RBI meet to react, apart from the Covid scenario and the vaccination drive.