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Business News/ Politics / Policy/  Inflation at 17-month low may prompt an RBI rate cut

Inflation at 17-month low may prompt an RBI rate cut

Retail inflation stood at 3.31% in October, while factory output grew 4.5% in September

The Monetary policy Committee (MPC) of the RBI slashed its inflation projection to 2.7-3.2% from 3.9-4.5% for the second half of the current fiscal. Photo: PTIPremium
The Monetary policy Committee (MPC) of the RBI slashed its inflation projection to 2.7-3.2% from 3.9-4.5% for the second half of the current fiscal. Photo: PTI

New Delhi: India’s retail inflation dropped to a 17-month low in November, while factory output grew to an 11-month high on the back of a lower base, conditions that allow for a potential rate cut in the first policy meeting under the new Reserve Bank of India (RBI) governor, Shaktikanta Das.

Retail inflation slowed down to 2.33% in November, below the central bank’s projection, from 3.38% a month ago, according to data released by the Central Statistics Office. Factory output measured by the index of industrial production (IIP) grew at a faster clip at 8.1% in October, compared with 4.5% in the previous month.

Urjit Patel in his last monetary policy committee meeting on 5 December, before resigning on Monday as RBI governor, kept policy rates unchanged and cut the inflation forecast for the rest of the fiscal, citing a sharp fall in crude oil prices and food “deflation".

With crude oil prices falling more than 30% from recent highs and an impending global slowdown and higher oil production in the US, analysts expect the upside to oil price rises to have been capped. Overproduction in farm output has led to a glut and farmers’ distress, with vegetable deflation hitting 15.6% in November and two consecutive months of overall food deflation.

RBI’s monetary policy committee (MPC) earlier this month slashed its inflation projection from 3.9-4.5% to 2.7-3.2% for the second half of the current fiscal. It expects inflation to quicken to 3.8-4.2% in the first half of the following year.

However, MPC retained the gross domestic product (GDP) forecast for the current year at 7.4%, with “risks somewhat to the downside", possibly to account for the credit squeeze and demand weakness.

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

The sharp easing in the headline consumer price index (CPI)-based inflation reflected a combination of favourable factors such as correction in retail fuel prices, discomfiting factors such as a deeper disinflation in food prices and base effects related to the waning impact of the house rent allowance revision for central government employees, said Aditi Nayar, principal economist at Icra Ltd.

“While it is too early to assess whether a rate cut would be forthcoming in the February 2019 MPC review, there is a significant likelihood of a change in the monetary policy stance back to neutral from calibrated tightening. This is likely to serve as a precursor to a repo rate cut in the first quarter of 2019-20, if inflationary risks remain in check," she said.

The Asian Development Bank in its supplement to the Asian Development Outlook on Wednesday revised downward its 2018-19 inflation forecast for India to 4.3% from its earlier estimate of 5%. It, however, retained its GDP growth projection at 7.3% for 2018-19 with some downside risks, while maintaining that economic growth in the September quarter was a bit slower than anticipated at 7.1%.

The multilateral lending agency said downside risks for India such as tighter credit as the non-bank finance sector experiences stress, limited fiscal space for public capital expenditure, and escalating global trade tensions could be offset by a recent decline in oil prices and by exports becoming more competitive as the rupee weakens.

The Indian currency is down 10% since the beginning of 2018, despite a recent rebound.

Capital goods, which indicate investment demand in the economy, shot up 16.8% in October, continuing to signal a revival in investment activity after GDP data last month showed gross fixed capital formation accelerating to 12.5% in the second quarter. Ranen Banerjee, leader, public finance and economics, at PwC India, said the boost in IIP came from the infrastructure sector, benefiting from government-led spending.

“We hope private sector investments will pick up soon, else the burden on the government and the risk of fiscal slippages will be higher," said Banerjee.

With the government overshooting its full-year fiscal deficit target in the first seven months (April-September) of the current fiscal and the drubbing it got in the latest assembly elections, several analysts expect the Narendra Modi-led government at the centre to take a populist turn, ahead of next year’s general elections.

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Updated: 13 Dec 2018, 11:41 AM IST
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