Wednesday, January 19, 2022

Retail inflation hits 2-year low; rate cut hopes heightened

Cash crunch prompted producers to sell cheap, resulting in lower food prices.

By: ENS Economic Bureau | New Delhi |
December 14, 2016 3:59:51 am
inflation, retail inflation, demonetisation, interest rate, food inflation, economy, busines news Lower inflation opens up the possibility of a rate cut by the monetary policy panel as early as February, as CPI inflation will likely undershoot the RBI’s target of under 5 per cent in the fourth quarter, analysts said.

Retail inflation hit a two-year trough of 3.63 per cent in November as demonetisation eased demand pressure and the base effect remained favourable.

Food inflation slowed to just 2.11 per cent, compared with 3.32 per cent in the previous month, as the cash crunch during the kharif harvest prompted producers to sell cheap, resulting in lower prices of many items at the retail level as well, analysts said.

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The fact that core inflation remained unchanged at 5 per cent in November suggests demonetisation hit farmers harder than manufacturers in the non-food and non-fuel sector. The food inflation slowdown may have been even more dramatic at the wholesale level, the analysts added.

Lower inflation opens up the possibility of a rate cut by the monetary policy panel as early as February, as CPI inflation will likely undershoot the RBI’s target of under 5 per cent in the fourth quarter, they said.

However, the quantum of the reduction may be limited to just 25 basis points, given upside risks, they said.

With crude oil prices inching up and even the government and the central bank promising better liquidity in the coming days, inflationary pressure may return as early as December, the analysts said. Although areas under various crops have risen until last Friday from a year earlier, any disruption in sowing in the coming weeks may cause the commodity markets to react adversely even before actual harvest starts from April.

However, as Pronab Sen, former chairman of the National Statistical Commission, said downside pressure on demand may still persist if people hoard the new currency for emergencies (fearing more demonetisation-like measures in the coming days) instead of spending.

Perhaps conscious of this fact, RBI deputy governor R Gandhi on Tuesday urged people to freely use notes they have got instead of holding them.

Last week, the RBI unexpectedly held the repo rate, suggesting rising crude oil prices may reverse the gains from lower vegetable prices. It added: “Volatility in crude prices and the surge in financial market turbulence could put the inflation target for Q4 of 2016-17 at some risk.” Given such a hawkish stance despite demonetisation, a very few analysts wager on aggressive rate cuts in the coming months.

Icra principal economist Aditi Nayar said: “Our view is that there is only room for one more rate cut of 25 basis points, given our estimate of the inflation trajectory, and the fact that there has been no change in the real interest rate assumption that the MPC (Monetary Policy Committee) has announced this time.” FE

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