New Delhi: India’s retail price inflation eased at a faster-than-expected pace to a four-month low in February, creating ideal conditions for the country’s central bank, if it is so inclined, to cut the policy rate at any time between now and a scheduled monetary policy review on 5 April.

Consumer price index-based (CPI-based) inflation softened to 5.18% in February from 5.69% a month ago, according to data released by the Central Statistics Office on Monday.

A Reuters poll of economists had estimated CPI inflation at 5.6% in February.

Hopes of further monetary policy easing by the Reserve Bank of India rose after the government stuck to its fiscal consolidation road map in the February budget by committing to its fiscal deficit target of 3.5% of gross domestic product for 2016-17.

With retail inflation coming in even lower than its target of 6%, analysts say a rate cut is more a matter of when than if.

Praising the budget, Reserve Bank of India (RBI) governor Raghuram Rajan on Saturday said that the central bank has been comforted by the government’s decision to stick to the fiscal consolidation road map. “How that feeds into monetary policy you have to wait and see," Rajan said at a press briefing after the RBI board meeting, alongside finance minister Arun Jaitley.

“On the policy date, or whatever dates we take action, we explain our actions at that point," he added.

Rajan has a target to bring retail inflation down to 5% by March 2017.

In its February bimonthly review, RBI said its stance remained accommodative even as it indicated that future rate cuts would depend on the trajectory of inflation and also the quality of fiscal consolidation.

RBI has already cut rates by 125 basis points (bps) since January 2015. Existing rigidities in the banking sector have allowed only about half of those rate cuts to get passed on.

One bps is one-hundredth of a percentage point.

The finance ministry has announced that it will lower interest rates on savings schemes with a tenure of less than five years, such as short-term deposits in post offices, effective 1 April, making the process dynamic and market-linked in order to bring down the cost of funds for commercial banks which they could subsequently pass on to borrowers by charging lower interest rates. RBI has expressed its concern over limited transmission of its policy rate cuts in the past.

Care Ratings chief economist Madan Sabnavis said the decline in retail inflation in February gives rise to hopes of a further monetary easing by RBI, especially with the government also sticking to its fiscal consolidation plan.

“However, the emergence of price pressure in the future cannot be ruled out, given the ongoing crop situation (reports of crop damages) and the uncertainties surrounding the global economy and markets," he added.

Unseasonal rain and hail in the past few days have damaged winter crops in parts of Punjab, Haryana, Rajasthan, Uttar Pradesh, Madhya Pradesh and Maharashtra. The extent of damage remains unclear.

Aditi Nayar, a senior economist at Icra Ltd, said commitment to fiscal consolidation by the Union government, in conjunction with the three-month spell of contraction of industrial output and softer-than-expected headline inflation, have significantly bolstered the probability of a 25 bps cut in the April monetary policy review.

However, Nayar said the risk of a rise in inflation on account of stronger domestic demand post the Pay Commission’s award should not be written off at this juncture. “Factors such as the monsoon and efficacy of food management would also influence the inflation trajectory and the total quantum of rate cuts in 2016," she added.

The Economic Survey released before the budget said the hike in the pay of government employees will have a negligible impact on inflation as the wage increases are unlikely to spill over to the private sector. The survey projects retail inflation to remain between 4.5% and 5% in 2016-17, meaning RBI will be able to achieve its 5% retail inflation target by March 2017. This would allow RBI to ease liquidity conditions and further lower the policy rate, consistent with meeting the inflation target, the survey said.

The slowing of the retail inflation rate in February was driven by lower food inflation at 5.3% in February against 6.85% in January, mostly due to decelerating vegetable price inflation at 0.7% in February against 6.39% in the previous month. Prices of pulses continue to rise at a faster pace at 38% in February despite a marginal decline from its level in the previous month. Services inflation for items including health, transport, communication, recreation, education and personal care continue to rise at 4.38% in February against 3.95% in January.

Separately, data released by the industry department showed India’s wholesale price index-based inflation rate contracted for the 16th straight month in February to 0.91%, driven down by low oil prices and softening vegetable prices.

The government also announced the composition of the monetary policy committee in the Budget. This committee will guide interest rates. It will have six members, with three appointed by RBI and three nominated by the government through a search committee. The RBI governor will have the casting vote in case of a tie.

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