Inflation rises, but no need to worry as RBI may still cut monetary policy rate

By: | Published: March 13, 2019 4:14 PM

Moreover, the core inflation is also at a one-year low of 5.4 per cent, said the report. This can be attributed to diminishing effect of Seventh Pay Commission and low inflation in the clothing and footwear sector.

The retail inflation has risen to a four-month high and is expected to rise further with an increase in the prices of vegetables and pulses, prompting some to worry about a possible tightening of monetary policy. India’s Consumer Price Index inflation rose to 2.6 per cent in February. However, there is still likelihood of a further rate cut by the Reserve Bank of India (RBI) in its next Monetary and Credit Policy in April, as the GDP growth remains slow and IIP growth is subdued, said CARE Ratings in a report.

“Headline inflation will continue to be in RBI’s target range but will move up towards 3 per cent by March end. In terms of monetary policy action, there is an even likelihood of a rate cut of 25 bps in the April 2019 policy,” said report.

The retail inflation in February 2019 increased to 2.57 per cent from 1.97 per cent in January, 2019, according to the Central Statistics Office (CSO) data. This is due to the favorable base effect and slowdown in the deflationary trend in food inflation, report added. The deflationary impact was limited due to rise in prices of cereals, meat and fish, eggs, oils and fats, non-alcoholic beverages and prepared meals, it noted.

Moreover, the core inflation is also at a one-year low of 5.4 per cent, said the report. This can be attributed to diminishing effect of Seventh Pay Commission and low inflation in the clothing and footwear sector.

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The industrial output has grown by 1.7 per cent in January 2019, which is lower than 7.5 per cent in January 2018 and 2.4 per cent in the previous month. The growth is even lower than the CARE Ratings estimate of 1.9 per cent. The slowdown can be attributed to subdued manufacturing growth due to high base effect and lower production.

Considering that the inflation will remain within the target range, there is a chance of a further rate cut by the central bank in the next policy outing in April to give impetus to growth, report also said.

Similarly, a recent report by Kotak Securities has also pointed out towards the likelihood of a 25 basis rate by cut by the RBI as the inflation it expects inflation to remain benign and within the target of 4 per cent. However, risks may arise from food, fuel, monsoons and a sticky core inflation, it added.

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