Retail inflation eased significantly in November, with the Consumer Price Index (CPI) growing just 3.63 per cent, its slowest rate in two years, due to a sharp slowdown in food inflation.
Slowing since July
Growth in the CPI was 4.2 per cent in October, and has been steadily slowing since July, when it was 6 per cent. This was mostly due to food inflation, which registered its fourth consecutive month of slowdown, coming in at 2.56 per cent in November from eight per cent in July.
The Reserve Bank of India had, in its latest policy review, kept interest rates unchanged citing concerns over the possibility of firming oil prices fuelling higher inflation.
However, this did not come to pass, with consumer inflation trending downwards consistently, and economists predicting a rate cut in the next policy review in February.
While the demonetisation of high-value currency notes has hit consumption expenditure, core inflation has largely remained stable. The main effect of this will be felt over the rest of the quarter, according to economists.
“They had a certain assessment, and their concern was mainly driven by the likelihood of crude prices firming up,” D.K. Srivastava, Chief Policy Advisor, EY India told The Hindu . “But this was not the trend. The trend was, including food prices, all prices were falling. They probably wanted to wait before taking a final call on the interest rate. And this downward trend in CPI will be further accentuated in this quarter due to demonetisation.”
“The fall in retail inflation seems to be on the back of a favourable base effect coupled with some downside due to the move to demonetise,” Rishi Shah, Economist at Deloitte India said. “Core inflation has largely remained stable indicating no immediate impact from demonetisation,” Mr. Shah said.
“The fine print shows that a decline in prices of perishables such as fruits and vegetables have had a major impact,” Mr. Shah added. “As such, while some of the impact is seasonal, insufficient liquidity in the system could also have imparted downward pressure.”
Inflation in the pan, tobacco and intoxicants category eased to 6.3 per cent in November from seven per cent in October. Inflation in the clothing and footwear category slowed to five per cent in November from 5.24 per cent in October.
The fuel and light category saw inflation slowing marginally, at 2.8 per cent in November compared with 2.9 per cent in October. The housing segment, similarly, saw inflation slowing to 5.04 per cent from 5.15 per cent over the same period.
Rate reduction
“The case for reducing interest rate by the time of the next RBI policy review would have become stronger,” Mr. Srivastava said.
“Overall, the (core inflation) number is likely to remain below the RBI’s threshold of 5 per cent for March 2017 in the coming months and should pave the way for another 25 bps cut in the coming months,” Mr. Shah said.
