Retail inflation, calculated on the basis of Consumer Price Index (CPI), declined to 4.59 per cent in December last year as vegetable prices plunged sharply. As per government data, the inflation rata in November 2020 stood at 6.93 per cent. This is the lowest point in retail inflation since March last year, when it was pegged at 5.84 per cent, marking a return to the comfort range of 2-6 per cent prescribed by the Reserve Bank of India for the first time in nine months.
Inflation in food basket plunged sharply during the month under review, ending at 3.41 per cent, showed government data released on Tuesday. The same stood at 9.50 per cent in November. The steep decline came on the back of 10.41 per cent deflation in vegetable prices. However, this was the only section that saw a decline in prices last month.
Cereal and other products saw marginal rise in price during December last year at 0.98 per cent. Inflation in meat and fish, and egg segments stood at 15.21 per cent and 16.08 per cent, respectively. Oil and fats prices grew 20.05 per cent during the month. Milk and dairy products saw prices rise 3.98 per cent. Fruit prices grew only 2.68 per cent in December, whereas pulses and associated products got dearer by 15.98 per cent.
Sugar and confectionary prices increased only 0,53 per cent in December, whereas spices got costlier by 10.29 per cent. Inflation in non-alcoholic beverages was recorded at 11.86 per cent and that in prepared meals, snacks, sweets, etc. touched 4.81 per cent.
"CPI inflation has been above RBI's upper bound inflation target of 4 +/-2 per cent for more than 11 months. The recent rise in commodity prices with pick up in the global economy and depreciating dollar exerts cost push pressures, keeping inflation near 5-6 per cent levels in the near term. Additionally, a broad based domestic and global economic recovery should improve aggregate demand, posing upside risk to inflation," said Rupen Rajguru, Head - Equity Investments and Strategy, Julius Baer India.
"On the other hand, favorable base effect, appreciating Indian rupee and any risk of second or third wave of COVID-led slowdown will be a tailwind for CPI inflation. Overall, we expect inflation to average between 5-6 per cent in CY21," he further added.
RBI closely observes retail inflation figures to determine key policy rates. The CPI-based inflation has held a declining trend over the past few months, declining to 6.93 per cent in November from a six-year high of 7.61 per cent in October.
Despite high inflation rates, the central bank had defended the inflation target of 4 per cent for India. A recent working paper by Harendra Kumar Behera and Michael Debabrata Patra, stated that there is a steady decline in trend inflation to 4.1-4.3 per cent since 2014. Setting an inflation target below the trend may impart a deflationary bias to monetary policy because it will go into overkill relative to what the economy can intrinsically bear in order to achieve the target, said the paper titled 'Measuring trend inflation in India'.