Given the structural collapse in India’s consumer price inflation (CPI) trajectory, there is simply no reason left for the central bank to not implement an out-of-cycle policy review. So far, RBI has made two arguments to not cut rates. First, the sharp fall being seen in CPI rates has more to do with food inflation coming down and, second, much of the recent fall would get corrected once the favourable ‘base effect’ wore out. Neither of the arguments, FE has been pointing out for months, really holds true, and the latest data out for December bears this out. For one, with CPI averaging around 10% for most of 2013, there was no real base effect except in November 2013 when inflation rose to 11.2%; yet, CPI had been falling steadily, from 10.8% in January 2013 to 8.8% in January 2014, all the way down to 4.4% in November 2014 when, going by RBI statements, the base effect existed. But, in December, the first month where there was no base effect, CPI inflation was a benign 5%. If you eliminate food and fuel articles to get the core inflation, the impact there has been even starker with core CPI falling from 8.1% in January to 7.41% in July and a mere 5.23% in December 2014. Do the same exercise by seasonally adjusting the data, and the inflation numbers are even lower. Indeed, for all RBI’s public pronouncements about how inflation’s back had not yet been broken, and its unreliable consumer expectations survey, its ‘central tendency’ for March 2015 inflation was 7.75% in October and this had fallen to 6% last month.
Since this collapse in core inflation has not been driven by either food or fuel prices, what explains this? Pretty much what has been obvious for months, that with no demand drivers, inflation falling was just a matter of time. While IIP in the April-November period—IIP data also came out Monday—was 2.2% versus 0.1% in the same period of the previous year, the low print underscores the low level of demand. Apart from the fact that this is the second year of severe demand compression by government, household expenditures have slowed dramatically due to no visible signs of an increase in jobs or incomes; in rural areas, which is where RBI studies argue inflation really originates from, the lower MSPs have killed the inflation push higher prices gave, as did lower government spending on MGNREGA and other rural programmes. Given the benign global food price environment and the fact that the impact of the sale of FCI’s huge foodstocks hasn’t been felt—there has been no dramatic increase in sales so far—even if commodity prices were to rise again, the government has enough headroom to take care of this. Given there are no real drivers of economic growth that can be seen, and therefore no possible threat to inflation, it is not clear what is holding RBI back from making a sharp 50bps cut in repo rates to begin with.