New Delhi: India’s retail inflation and wholesale inflation fell to multi-month lows in December amid signs of weakening economic recovery, creating wiggle room for the Reserve Bank of India’s (RBI) monetary policy committee to cut interest rates at its meeting on 7 February.

Data released by the Central Statistics Office (CSO) showed consumer price index (CPI) based inflation at an 18-month low of 2.19% in December against 2.33% a month ago, as food prices continued to slide. The wholesale price index (WPI) data released earlier in the day by the Department of Industrial Policy and Promotion showed that wholesale price inflation decelerated to an eight-month low of 3.8% from 4.64% the previous month, on the back of softening inflation for fuel as well as manufactured items.

With crude oil prices falling 40% in past three months, higher oil production in the US and weakening oil demand, analysts do not expect oil prices to rise further. While the Indian crude basket declined to $57.8 billion per barrel in December from $65 billion per barrel a month ago, the rupee appreciated to 70.72 per dollar in December from 71.79 per dollar in the previous month, slowing fuel inflation.

Slower-than-expected economic growth projection and a benign inflation scenario may force RBI under its new governor Shaktikanta Das to change its stance and cut rates to support growth.

India’s factory output growth—measured by an index and industrial production (IIP)—crashed to its lowest in 17 months at 0.5% in November, the outcome of an unfavourable base effect as well as contraction in manufacturing, data released by CSO on Friday showed.

The CSO’s full-year growth estimate suggests that in the second half (October-March) of 2018-19, the economy may slow down to grow at 6.75% compared to 7.65% in the first half (April-September).

B. Prasanna, head, global markets group at ICICI Bank, said he expects the RBI’s monetary policy committee to change the stance to neutral in the February policy and remain on an extended pause on policy rates. “Despite the sharp fall in petrol and diesel prices in December, the core inflation (CPI) was elevated. This was due to the high sequential inflation seen in health and education sub-groups. CPI trajectory is likely to remain benign till H1 FY20, after which it may show an uptick," he added.

Shubhada Rao, chief economist at Yes Bank, said going forward, she expects further downside in her average inflation projection of 4% in FY19, closer to the 3.5-3.7% band. “This paves way for the MPC to not just change its stance to neutral but also mull over a possible rate cut," she added.

However, Sunil Kumar Sinha, principal economist at India Ratings, said RBI may watch out for the fiscal deficit target of 3.3% of GDP in 2018-19 which may be missed. Finance minister Arun Jaitley will present his Interim Budget on 1 February ahead of the general elections due in April-May. The government has already exhausted 112% of the full-year fiscal deficit target in the first eight months (April-November) of the fiscal year. Subdued collections in goods and services tax (GST) and slow progress in its disinvestment programme have put pressure on the government’s fiscal math for the current year.

RBI governor Shaktikanta Das, who took charge last month, said at his first press conference that inflation remained within RBI’s target and its outlook was benign. “But we need to be watchful," he said, ahead of the next policy meeting in February.

Principal economic adviser in the finance ministry Sanjeev Sanyal had in an interview last month said RBI needs to structurally reduce interest rates as the government has anchored inflation to a lower level.

“We have had low inflation for quite a long period now and, therefore, it is fair to say that structural inflation has come down very significantly from the old 7-10% range. However, since nominal interest rates have not fallen as quickly, our real interest rates are very high. Real lending rates for MSMEs is above 800 basis points, which is clearly too high," Sanyal said.

Hundred basis points is equal to one percentage point.

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