The Consumer Price Index (CPI) inflation has dipped sharply to a one-year low of 4.31% compared to 5.05% in August. The decline has largely been on account of food inflation which dipped to 3.88% as against 5.91% in August. Both rural and urban inflation have dipped significantly to levels of 4.96% and 3.64% compared to 5.8% and 4.22% respectively in August. Most analysts have cheered the steep decline in inflation and believe that this opens room for the RBI to cut repo rate by another 25 basis points in this fiscal. This means that consumers have reason to cheer, for not only food lower inflation free up more money in their budgets, the possible rate cut would give banks greater flexibility to lower interest rate, translating into lower personal, car and home loan EMIs!
Says Shubhada Rao, Chief Economist at Yes Bank, “CPI has come down because of food disinflation. The extent of this disinflation has been rapid in the last few months, led by vegetable and pulses prices. There is expectation of bumper food crop and robust food grain production, so to that extent prices will continue to head lower in the coming months.” Rao tells FE Online that from November to February, headline inflation may print below 4%. “This opens up room for a 25 bps rate cut from December to March,” she expects.
Agrees DK Srivastava, Chief Policy Advisor at EY India, who told FE Online that RBI is more likely to cut rates in the later months of the financial year, than December. “The decline in CPI was expected after the reasonably fine monsoon, but the sharpness of the fall is surprising. I think inflation will continue to decline for the next two months, before settling at more normal levels. It remains to be seen if that level is above or below 5%,” he observes. “As far as the RBI goes, I think the MPC would likely wait in December to know where inflation levels settle. If CPI inflation settles between levels of 4% to 4.5%, then there is room for another 25 basis points cut in this financial year,” he says.
Aditi Nayar, Vice President & Senior Economist, ICRA also attributes the dip in inflation to pulses, vegetables and fruits. “ICRA continues to expect CPI inflation to track a U-shaped trend in the remainder of this fiscal, with a dip in inflation to ~3.7% in November 2016 followed by a gentle uptrend to ~5.0% in March 2017, on account of the waning of the base effect and the impact of higher consumer demand on prices,” Aditi Nayar says.
Rupa Rege Nitsure, Group Chief Economist at L&T Finance Holdings believes that the sharp fall in inflation is also on account of the base effect. “The decline in CPI is more pronounced than expected, probably because of a steep sequential fall in the prices of various types of pulses, vegetables and fruits. A favourable statistical base has also helped to a great extent in keeping the headline CPI print benign,” Nitsure told Reuters. “Until February we are going to see benign prints in CPI, which will open up space for at least one more rate cut in FY17 under the present regime,” Nitsure added.
The Monetary Policy Committee (MPC), led by new RBI governor Urjit Patel, had last week cut the repo rate by 25 basis points. This was the first policy review under the MPC, which is a 6 member committee, that decides on the monetary policy course. MPC’s main aim is inflation targeting. The RBI and government have agreed on a target of 4% for the duration starting from August 5, 2016 to March 31, 2021. The ‘upper tolerance’ level for the target is 6%, while the ‘lower tolerance’ level is 2%.