India’s headline and core inflation rates are set to converge in the coming months as the economy slows, increasing the chance of more interest rate cuts.
The core measure which strips out volatile fuel and food costs has remained sticky at around 6 percent and is a key reason economists cautioned against more rate cuts after last week’s surprise easing. It softened to 5.4 percent in January, according to economists at Yes Bank Ltd. and Axis Bank Ltd. Pranjul Bhandari, chief India economist at HSBC Holdings Plc, sees it slowing to as low as 4 percent this year.
For now, headline inflation eased further as food prices extended their fall, albeit at a slower pace. Consumer-price growth reached 2.05 percent in January, well below the Reserve Bank of India’s medium term target of 4 percent.
Shaktikanta Das, the RBI’s new governor, voted for a cut despite only weeks earlier acknowledging the challenges posed by the divergent paths taken by core and food inflation.
Viral Acharya, the RBI’s deputy governor in charge of monetary policy who was among those who sought to keep rates unchanged, has in the past pointed to core inflation as being a more reliable indicator.
The convergence of the two measures, along with recent surveys from the central bank suggesting slowing inflationary expectations among households and industry, will be key for a clearer assessment of policy actions by the Monetary Policy Committee. The six-member panel last week voted 4-2 to lower the key interest rate.
“The reason why the split matters is because food tends to be more volatile, the core inflation tends to be more persistent,’ Acharya told reporters Feb. 7, referring to the divergence.
