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Business News/ Politics / Policy/  Retail inflation eases to three-month low in March
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Retail inflation eases to three-month low in March

Retail prices rose just 5.17% in March as food prices fall despite unseasonal rains that damaged crops

While rural retail inflation rate slowed to 5.58% in March from 5.79% a month ago, urban retail inflation rate eased to 4.75% in March from 4.95% in February. Photo: Indranil Bhoumik/MintPremium
While rural retail inflation rate slowed to 5.58% in March from 5.79% a month ago, urban retail inflation rate eased to 4.75% in March from 4.95% in February. Photo: Indranil Bhoumik/Mint

New Delhi: India’s retail inflation surprisingly eased in March to a three-month low as food prices softened, despite the damage to spring harvest in more than 14 states following unseasonal rainfall and hailstorms in the month, raising hopes of further monetary easing by the central bank in its next policy review in June.

Retail prices rose 5.17% in March, slower than a 5.37% increase in the preceding month, the ministry of statistics said on Monday. Food inflation slowed to 6.14% in March from 6.88% a month ago.

The Reserve Bank of India (RBI) kept its benchmark policy rate unchanged at 7.5% on 7 April and said it would wait for banks to pass on interest rate cuts that have already been announced before further easing.

Some of the biggest banks in India have pared their base rate marginally since then.

While the rural retail inflation rate slowed to 5.58% in March from 5.79% a month ago, the urban retail inflation rate eased to 4.75% in March from 4.95% in February.

Consumer “inflation is projected at its current levels in the first quarter of 2015-16, moderating thereafter to around 4% by August but firming up to reach 5.8% by the end of the year," RBI governor Raghuram Rajan said in the first monetary policy statement of the new financial year. RBI cut the policy rate by 25 basis points on 4 March, the second cut outside a scheduled monetary policy review since January. The first rate cut of the cycle was announced on 15 January. A basis point is one-hundredth of a percentage point.

The fact that unseasonal rain did not have any significant impact even on vegetables prices raises hopes that inflation will continue to show a benign trend, said Samiran Chakraborty, managing director and head of South Asia Macro Research at Standard Chartered Bank.

“We expect RBI to cut policy rates by another 25 bps on its policy review on 2 June. The fact that the monetary transmission process has started will provide some comfort to RBI," he added.

While the extent of crop damage remains somewhat unclear, concerns related to the impact of unseasonal rain on food prices are yet to completely dissipate, said Aditi Nayar, a senior economist at Icra Ltd.

“If the monsoon is normal and crude oil prices do not post a significant rebound, Icra expects consumer inflation to average 5.5% in 2015, limiting future rate cuts to 50 bps over the remainder of 2015," she added.

Opportunities and risks

India’s factory output accelerated to a three-month high at 5% in February against 2.8% a month ago and car sales grew for the first time in three years in March, signalling a sustained turnaround in the industrial activities in the country, after a majority government under Prime Minister Narendra Modi government took charge at the centre 11 months ago.

Rating agencies have also been upbeat about India recently, with Moody’s Investors Service Inc. upgrading India’s credit rating outlook to ‘positive’ from ‘stable’, while its peer Fitch kept the outlook unchanged at ‘stable’.

Moody’s on Thursday said it believes that recent measures taken by the government to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment in many sectors, including insurance and railways, and facilitate infrastructure development will reduce some of India’s sovereign credit rating constraints.

Fitch said implementation of the government’s reforms agenda and structurally lower inflation would improve the sovereign credit profile, as both would create a better investment climate and boost real gross domestic product growth.

Standard and Poor’s provided a reality check on Monday when it warned in a report that India’s hard-won fiscal improvements could fail to withstand an external shock given “less than rock solid" public finances that remain a concern for its sovereign rating profile.

“While the country’s budgetary performances have strengthened in recent years, its hard-won fiscal improvements could yet unwind because of a financial or commodity shock," the rating agency said in a report, citing the need to pay out costly subsidies and interest on government debt.

RBI’s Rajan, in his monetary policy statement, also cautioned that there are upside risks to the central projection emanating from possible intensification of El Niño conditions leading to a less than normal monsoon; large deviations in vegetable and fruit prices from their regular seasonal patterns, given unseasonal rain; larger than anticipated administered price revisions; faster closing of the output gap; geo-political developments leading to hardening of global commodity prices; and spillover from external developments through exchange rate and asset price channels.

“However, at this juncture, these upside risks appear to be offset by downsides originating from global deflationary/disinflationary tendencies, the still soft outlook on global commodity prices; and slack in the domestic economy," he added.

The chances of El Niño, which is strongly associated with lower rainfall in India’s monsoon season, has risen to 70%, the US government’s weather forecaster said on Thursday.

The US National Oceanic Atmospheric Administration in its earlier advisory in March had predicted a 50% chance of El Niño continuing in the northern hemisphere summer, which was in line with the forecast of Australia‘s Bureau of Meteorology.

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Published: 13 Apr 2015, 06:11 PM IST
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