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We were already paying the price, with eyes brimming with tears; the retail inflation or CPI just confirmed that yesterday evening.

CPI for the month of December’19 crossed the RBI comfort level, going up to 7.35% v/s 5.54% in November. YoY, the jump is huge from 2.11% in Dec’18. This is a 5-year high!

The main culprit was food inflation, rising to 14.12% v/s 10.01% (YoY) and of this, the lions share came from the jump in vegetable inflation ay 60.5% v/s 36%. Obviously, this was led by the tear inducing price of onions.

Other internals of the CPI for Dec’19: (MoM)

Cereals and products – 4.36% v/s 3.71%

Pulses and products – 15.44% v/s 13.94%

Meat and Fish – 9.5% v/s 9.38%

Eggs – 8.7% v/s 6.2%

This jump of CPI to 7.35% is way above the RBI’s range of 4% with a margin of 2% on either side; we are now at 3.35% on the upper side.

Now the BIG question is – what will RBI do? The MPC does not need to take a decision now; its meet is scheduled on 6th Feb, 5 days after the Union Budget. So even if this data is disturbing, RBI will wait and see what the Govt gives in the Budget.

But purely on what we have now, if it had to work only on that, it would have been a status quo like the one in Dec, maintaining the benchmark rate at 5.15%.

And the RBI is already prepared for a slower economic growth; in the October policy it had revised the GDP downwards to 5% from earlier 6.1%. Even the Govt a few days ago announced a slower economic expansion for FY20 at 5% v/s its earlier 6.8%. Thus slowing growth for FY20 is a given and the RBI is not going to get into a rescue mode to save the economy and bring down rates even when inflation is high. Also we need to remember that this huge jump in CPI was mainly on account of the onion prices; as that has started easing, we will see the CPI also coming down in the months ahead.

If the kharif harvest remains bountiful, based on the data that we have currently, we can say that in 2020, we could see two more rate cuts. But for now, in the immediate future, it could pretty much be a pause, a pregnant pause.

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