India: Inflation divergence calls for greater stimulus – ANZ

ANZ analysts suggest that India's inflation data mirror the consumption trends in recent months as core inflation has continued to slip, in line with weak demand, but the difference between rural and urban consumer price index (CPI) has been amplified in 2019 led by higher food prices while core inflation has been moderating for both.

Key Quotes

“The difference in inflation rates is visible across Indian states as well, with the degree of inter-state variation also increasing in recent years.”

“The trends in CPI and wholesale price index (WPI) are also diverging. It is clear that manufactured products are driving the slide in WPI, indicative of the weak pricing power of industrial companies. This sits with the sharp decline in the RBI's forward-looking surveys for capacity utilisation rates.”

“Amid the differing trends, what stands out is a secular slowdown in non-food inflation across these indices. We thus reiterate the need for more demand augmenting measures to revive waning consumption growth. This will support convergence of inflation rates across regions and states, making monetary policy more effective; and between CPI and WPI as firms regain pricing power.”