India's chronically high inflation cooled to 7.5 percent in December thanks to lower food costs, but economists warn that India is still plagued by supply bottlenecks that are likely to keep prices rising. India's headline inflation has been above 9 percent nearly every month for two years, prompting the central bank to hike interest rates 13 times in a row.
While Monday's data may bring some relief to central bankers and business people concerned about the hit to growth from high interest rates economists warn the decline was dramatised due to high prices this time last year, when the price of onions spiked.
Jay Shankar, chief economist at Religare Capital Markets, called the data a "statistical mirage." He said the central bank is unlikely to cut rates until the base effect fades, in May.
In the meantime, supply constraints remain, and in some cases are getting worse, even as demand remains relatively robust. Food prices softened in December but the cost of manufactured products held steady. December food prices rose just 0.7 percent from a year ago, thanks to plunging prices of potatoes and onions. That is a huge improvement food inflation averaged 9.2 percent a month from July to November, the data showed. The cost of manufactured products rose 7.4 percent from a year ago, versus a July-November average rise of 7.8 percent a month, the data showed.
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