With brent crude oil prices hitting a four-year low of $88 per barrel and favourable base effect continuing until January, retail inflation is expected to remain subdued over the next 3 months, analysts said. Most of them, however, dont yet expect a cut in the benchmark lending rate this fiscal to spur growth, pointing at the Reserve Bank Of Indias (RBIs) resolve to break the back of inflation.
Although retail inflation could undershoot the central banks target of 8% by January, it could still observe a status quo in the key policy rates this fiscal, factoring in the potential impact on inflation once the relatively favourable base impact start to wear off after December and a smaller summer crop due to poor rains. A likely tightening of the US interest rates by the Federal Reserve, and its possible impact on the rupee, will also keep the RBI guarded.
The monthly CPI inflation had risen in the range of 9.9-11.2% in the October-December quarter in the 2013-14 fiscal, providing a conducive base for calculation this fiscal.
Core CPI at a record low
Importantly, core consumer price index (CPI), too, dropped to a record low of 5.9% in September, compared with 6.9% a month before. While the headline retail inflation averaged 8% so far in 2014, the core CPI rose at an average of 7.4% this year. In 2013, the average monthly CPI stood at 10.1% while the core CPI was as high as 8.43%.
RBI has said they will wait for inflation to come down durably. So just going by one observation, they cannot take the final call, said Rupa Rege Nitsure, chief economist at Bank Of Baroda. (However), even if inflation print turns ugly post-November or December, given the fact that industrial activity has weakened so much, they may not increase the rates. That is why I say it will be a prolonged pause, she added.
Anis Chakravarty, senior director at Deloitte in India, said: Fuel prices remain globally linked while an upside risk on vegetable prices remain till the end of the third quarter. However, the RBI will find some comfort in these numbers and will aid in the nominal anchoring that has been set. We do not expect the rates to be revised until this trend of sub-7% CPI holds.
Vegetable inflation slowed to 8.59% in September, compared with 15.15% a month before, helping the overall CPI to come down last month. Similarly, fuel inflation slowed to 3.45% last month, compared with 4.15% in August. With brent crude oil prices remaining subdued due to global growth concerns, it would augur well for a large importer like India, also because it could potentially cut oil subsidies.
Some analysts said any pick-up in domestic demand should the economy turn the corner and the recent upward revision in royalties paid to states by miners could pressure inflation in coming months.
However, they ruled out a flare-up in food inflation both in the WPI and the CPI despite below-par rains, partly due to favourable bases. Since food and fuel items make up for around 60% weightage in the CPI basket, they dont see any sharp rise in both the inflation gauges in the rest of the year, although these may not slow substantially as well. CPI food inflation slowed to 7.67% last month, compared with 9.42% in August.