Uptick in CPI inflation validates caution displayed by MPC: ICRA

The hardening of the CPI inflation in December 2017 was led by the sharp jump in inflation for housing, as well as a base-effect led uptick in food inflation, with a limited impact of the cut in GST rates, said ICRA today.

According to the credit rating agency, the uptick in the CPI inflation to a 17-month high in December 2017 validates the caution displayed by the Monetary Policy Committee in its recent reviews. 

"The rise in housing inflation is likely to be persistent, while rising crude oil prices pose another risk. However, the reversal of other transient factors such as the expected seasonal moderation in food prices may help to cool inflation," the agency said. 

Aditi Nayar, Principal Economist at ICRA, said, "For 12 consecutive months from  November 2016 to October 2017, the CPI inflation remained below 4% and averaged around 3.1%, benefitting from a favourable base effect. Given that the MPC responded to the period of transient ‘low’ inflation with only one rate cut of 25 bps in August 2017, we do not expect it to commence hiking rates unless the CPI inflation is forecast to persist above 5.0% for at least two quarters." 

"We expect the MPC to see through the jump in housing inflation in December 2017 in the upcoming policy review, which would be presented shortly after the Union Budget," Nayar added. 

The uptick in the CPI inflation and continuing concerns related to the GoI's fiscal deficit targets for FY2018 and FY2019 are likely to keep bond yields elevated in the ongoing month, the ICRA statement added.