Retail and wholesale price inflation eased in October on lower food inflation, brightening prospects of a rate cut by the monetary policy panel as early as December, as the government’s demonetisation move is expected to keep short-term price pressure under control.
While the consumer price index (CPI) rose 4.2% in October — the lowest since August last year — wholesale price inflation dropped for a second straight month to 3.39%.
This CPI inflation moderation was driven by a drop in food inflation to 3.3% (drop of 60 bps) — especially in vegetables, fruits and pulses. However, core inflation, a key input in monetary policymaking, inched up a tad to 5% in October.
Some analysts expect inflation to hover around 4% over the next three months before rising towards the end of the fiscal once pent-up demand following demonetisation starts to stoke inflationary pressure.
The monetary policy committee (MPC) reduced the policy rate by 25bps to 6.25% at its October 4 meeting.
“The black money drive will increase the pace of deceleration, specifically in the services sector, which has lot of cash transactions,” said Soumya Kanti Ghosh, chief economist at State Bank Of India. “I expect a rate cut in December and that won’t be the end of rate cuts,” he added.
Retail inflation may undershoot the inflation trajectory (the CPI inflation target approved by Parliament is 4%+/-2% until March 2021), leaving enough room for a more accommodative policy.
However, the monetary policy panel is expected to closely watch the GDP data for the second quarter, to be released this month, before choosing to going for another round of cut, said Aditi Nayar, senior economist at ICRA.
Crisil Research wrote: “..we think the positive impact of a favourable monsoon this year is reflecting in lower food prices. Further, the recent demonetisation measure, we believe, will curb demand and put downward pressures on inflation in the short run. Going ahead, we expect inflation to trend lower and average 4.8% in the second half of fiscal 2017.”
The MPC had stressed that the recent drop in inflation reflected a downward shift in food inflation momentum and opens up space for policy action. It emphasised that the implementation of the Seventh Pay Commission recommendations, especially the increase in house rent allowance, and the increase in minimum wages due to possible spillovers through minimum support prices, could pose a challenge going ahead.