InvestorQ : What is your view on the inflation figures announced on 14 December?
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What is your view on the inflation figures announced on 14 December?

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1 month ago
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Retail inflation or CPI inflation as it is better known for the month of November 2020 fell sharply to 6.93% on the back of softer food prices. This compares very favourably with 7.61% inflation reported in October and even the street estimates of inflation were much higher at around 7.21%.

However, it must be remembered that the actual retail inflation is still way above the RBI comfort level of 6%, which by itself is 200 bps spread above the average inflation. The good news was that the Nov-20 inflation was sharply lower than the Oct-20 figure and the biggest reason was the gratifying fall in the components of the food basket.

Food inflation for the month of November 2020 fell sharply from 11% to 9.43% on a sequential basis. However, the core inflation which is the inflation outside of food and oil, was up to a 2-year peak of 5.79% in November. That is a worry because core inflation tends to be sticky and that has to come down if RBI targets have to be met.

Why is this fall important? The CPI inflation is a critical data point for the RBI monetary policy. In fact, with the latest fall in retail inflation, the RBI and its monetary policy committee or MPC are most likely to continue to hold to its accommodative monetary stance.

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