1. Dip in inflation, rise in IIP unlikely to alter RBI’s rate stance

Dip in inflation, rise in IIP unlikely to alter RBI’s rate stance

Food and fuel prices cooled to 5.52 pct in October while industrial output grew 2.5 pct year-on-year in September.

By: | New Delhi | Updated: November 13, 2014 8:49 AM
RBI is unlikely to cut rates until it is fully convinced that the inflation genie is back in the bottle. The next monetary policy review is slated for Dec 2. (Reuters)

RBI is unlikely to cut rates until it is fully convinced that the inflation genie is back in the bottle. The next monetary policy review is slated for Dec 2. (Reuters)

Providing some relief to the government on economic front, retail inflation, helped by slower annual rises in food and fuel prices, cooled to 5.52 per cent in October, its lowest level since the government started releasing the data in 2012, while industrial output grew 2.5 percent year-on-year in September, its fastest pace in three months.

The consumer price index-based inflation, which the Reserve Bank of India tracks in setting lending rates, stood at 6.46 per cent in September, while the factory output, measured in terms of index of industrial production (IIP) registered 0.4 per cent growth in both August and July.
Even though the development indicates some uptick in economy, the relief on inflation is largely because of the base effect, experts said.

Several analysts agree that while the CPI inflation target set by the Reserve Bank of India’s could be achieved earlier, the central bank is unlikely to cut rates until it is fully convinced that the inflation genie is back in the bottle. The next monetary policy review is slated for December 2.

Research head of a leading global financial firm explained that in 2013 there was a sharp spike in food prices between July and October, which had led to a high inflation.

Inflation-IIP-graph

However, with prices remaining largely stable in the current fiscal and crude prices softening, the inflationary pressure has come down.
He said that while “it is a welcome correction; it is a little early to call a victory over inflation. If we do not see a similar sharp reduction in inflation in December-January, the inflation may go back to over 7 per cent. Therefore I think the RBI may wait before embarking on a rate cut path”.

Saugata Bhattacharya, chief economist, Axis Bank, also said that though the extent of price pressure has come down, decline in the retail inflation is partly due to base effect and partly due to decline in crude oil prices.

“The moderation in CPI is likely to continue before settling down around 6 per cent by March 2015. While the IIP will continue to grow consistently in the next two quarters… the growth and inflation mix will provide some headroom to the central bank for a rate cut,” Bhattacharya added.

Tags: InflationRBI
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