The consumer as well as wholesale price inflation dived to new lows in August on falling global commodity prices, bolstering chances of an interest rate cut by RBI.
Consumer price inflation, RBI’s benchmark, eased to 3.66 per cent in August from 3.69 per cent, while wholesale prices tumbled for a tenth straight month to minus 4.95 per cent compared with a provisional (-) 4.05 per cent in July.
The dip in inflation adds to pressure on RBI Governor Raghuram Rajan to cut interest rates for a fourth time this year.
Rajan, who has so far resisted pressure from the government as well as the industry on easing monetary policy, is to announce next bi-monthly policy on September 29.
The decline in inflation has been mainly on account of moderating prices of food items with the exception of onion and pulses. This has sparked fears of deflation in the economy, which some economist argue would create further problems in the coming days.
Also of concern is drought-like situation with about half of the country witnessing deficient rainfall.
Commenting on the data, Finance Minister Arun Jaitley said: “During the monsoon period because of seasonal variations, (prices) of some products go up. But overall inflation continues to moderate and seems to be under control.”
The wholesale inflation was (-)4.05 per cent in July. It has been in the negative zone since November 2014. In August last year, it was 3.85 per cent.
Price rise in onions and pulses was at 65.29 per cent and 36.40 per cent respectively during August, as per the data.
Overall, WPI food inflation basket remained in negative territory for second month in a row at (-)1.13 per cent.
According to Economic Affairs Secretary Shaktikanta Das said: “RBI will take a considered call on the issue. There is no divergence in perception. The government and RBI are working together. Taking into account the overall factors, RBI will take a considered call.”
Das who reviewed the fiscal situation along with other secretaries in the Finance Ministry, said in a tweet: “Declining inflation numbers (are) in line with governemnt expectations. Should augur well for the economy.”
As regards CPI inflation, a slower rate of price rise in fruit and vegetables and protein items, except for pulses, pulled the inflation to a new low of 3.66 per cent in August, as against 3.69 per cent in July.
CPI food inflation during the month, however, rose slightly at 2.20 per cent as against 2.15 per cent in July.
Vegetable prices declined at (-)6.36 per cent during the month while fruits were cheaper at an inflation rate of 0.99 per cent.
Industry body CII said CPI inflation has also been declining, RBI needs to reduce interest rates sharply to drive a recovery in demand.
“We expect RBI to reduce interest rates by 0.50 per cent in the forthcoming policy with statements supporting further easing in the near future,” CII Director General Chandrajit Banerjee said.
Chief Economic Advisor Arvind Subramanian had recently flagged deflationary fears in the economy, while NITI Aayog Vice-Chairman Arvind Panagariya had pitched for cut in policy rate by 0.50 per cent to 1 per cent saying that “this lever” can be used to boost growth.
“CPI inflation dipped slightly to print in at 3.66 per cent year on year in August. However, there were pockets of pressure from items like pulses…We would expect core inflation to remain ranged in the coming months.
“Overall, the possibility of some easing of rates has increased as the inflation trajectory is lower than what the RBI had earlier anticipated. That said, focus would now be on the crucial Federal reserve meeting on the 17th,” said Richa Gupta, Senior Director, Deloitte in India in a statement.
Ratings and research firm ICRA said CPI data lends support to the expectation of a repo rate cut in the RBI’s upcoming policy review.
RUPA REGE NISTURE, GROUP CHIEF ECONOMIST, L&T FINANCE HOLDINGS
“The inflation number showed that food prices, which generally creates seasonal uncertainty, has been well controlled, so there is no threat to inflation expectations.
“That opens up space for RBI to ease rates, but it may not have much impact on the real sector through the credit channels as a large number of banks are unable to cut rates due to huge, stressed assets.
“While any U.S. Fed rate hike will create short-term volatility, in my view RBI will give preference to CPI number than Fed because rate cut will augur well for long-term investment sentiment.”
A PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD
“Inflation is in line with our estimate. Despite vegetable and pulses inflation being a bit higher, overall inflation is benign.
“Inflation trajectory will be lower than RBI’s estimate. We expect the average inflation at 5.5 percent versus RBI’s 5.8 percent estimate by January 2016. So we expect RBI to cut the repo rate by 25 basis points in September.
“The risk to this call is if there is severe market volatility if the US Fed hikes their interest rate this week.”
MADHAVI ARORA, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI
“Definitely it’s a surprise on the upside, the vegetable inflation is the biggest surprise for us. It has come out higher than what data was implying.
“I think the overall food inflation remains benign due to base effect. Otherwise if you look at service inflation that has stayed pretty much close to 5 percent, so that way it seems that except for certain categories, the miscellaneous component seems to be relatively resilient.
“Food I think will be a worry in coming months because whatever base effect that was supporting the CPI number will fade in coming months, and I think vegetable inflation on a sequential basis will be something to look out for given that we are already seeing more of a drought-like situation now.
“It’s too early to say if it will sustain in the coming months, but it’s a big risk for CPI at this stage. That being said, we are still looking for a rate cut by the Reserve Bank of India.
“Despite the number being a bit of a surprise we will still see a rate cut in the coming policy, because if the Fed doesn’t move this time round it will be an opportune time for the RBI to move in the September policy.
INDRANIL PAN, GROUP CHIEF ECONOMIST, IDFC LTD
“Inflation has come higher than street expectation and this is the last month of favourable base effect on inflation.
“Inflation is expected to inch up from next month and there is no comfort from vegetable prices. Also, we expect the Fed to not hike rates in September, which means if RBI cuts rates this month then it may aggravate the capital outflow situation.”
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES
“The bigger thing is that soft inflation, and to some extent a deflationary trend, is continuing. We expect this continue. We expect a rate cut, if not immediately, by the month-end policy meet.”