Another rate cut soon? Lowest food inflation in 27 years gives RBI more headroom to support growth

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Published: April 15, 2019 12:02 PM

On the other hand, even those who expect inflation to accelerate don’t consider it a big threat. Inflation is likely to pick up it is expected to remain below RBI’s target level, said CARE Ratings.

Retail inflation rises to 2.57 pc in Feb, against 1.97 pc in Jan: Govt data

The Reserve Bank of India may keep its focus firmly on growth, despite a moderate rise in CPI inflation in March, as the central bank draws comfort from falling core inflation in the month and soft full-year food inflation, which fell to a 27-year low. Most experts say inflation will likely remain benign while growth uncertainties surround Indian economy.

A major factor keeping inflation in the economy benign is subdued food prices. According to recent government data, CPI food inflation during 2018-19 remained at 0.14 percent — which is the lowest since 1991. The low inflation, keeping well below target, has allowed the RBI to shift its focus to stimulate and support growth in the economy.

“CPI inflation continues to remain comfortably below the RBI’s target of 4% and thus we continue to see room for another 25 bps of rate cut in 1HFY20. We assign a higher probability of a rate cut in August as uncertainties surrounding the outcome of the election, monsoon and budget would have partly abated by then,” said a report by Kotak Economic Research.

READ ALSO: Don’t be too happy over constantly falling food prices; here’s what India stands to lose

The Central Statistics Office (CSO) recently cut its GDP growth estimate for fiscal 2019 by 20 bps to 7 per cent, indicating a slowdown from 7.2 per cent in fiscal 2018.

RBI’s Monetary Policy Committee in its first bi-monthly monetary policy statement for 2019-20 cut repo rate by 25 bps to 6 per cent — the lowest repo rate in about nine years since 2010, while keeping the policy stance unchanged at ‘neutral’.

Retail inflation picked up marginally in March to 2.86 percent compared with 2.57 per cent in February. The rise in CPI inflation was primarily due to an expected reversal in food inflation, which went up by 0.3 per cent said Kotak report.

However, industrial output growth in February was flat at 0.1 per cent in February on account of slowdown in the manufacturing sector, show CSO data. Core inflation softened to 5.1 per cent in March compared to 5.4 per cent in February. “We expect the core inflation trajectory to gradually moderate to 4.2% in FY2020 on the back of muted growth,” said Kotak report.

Other experts also expect inflation to remain benign and well under target, which will give room to Monetary Policy Committee to cut rates further. “Inflation is unlikely to pick up pace in FY20. Historical trends suggest WPI food inflation is unlikely to translate into CPI food inflation,” said SBI’s Group Chief Economic Advisor Soumya Kanti Ghosh in a Twitter post.

On the other hand, even those who expect inflation to accelerate don’t consider it a big threat. Inflation is likely to pick up it is expected to remain below RBI’s target level, said CARE Ratings. CARE Ratings expects 25-50 bps rate cut during the year, the timing of which will be data driven.

A benign inflation in future is also expected by Chief Economist and Executive Director of Anand Rathi Sujan Hajra. Even though he too expects a further rate cut, it may not happen in the next policy review, according to him. “Inflation, despite hardening, remains extremely benign as compared to the longer term trend. So we expect RBI to continue with neutral rate and accommodative liquidity stance. We expect 25-50 bps rate cut in 2019. However, after two successive cuts, RBI may pause in the next policy,” he said.

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