Stable inflation, slower industrial production raise chances of RBI rate cut2 min read . Updated: 12 Mar 2019, 11:23 PM IST
- CPI inflation accelerates to a four-month high of 2.57% in February, while IIP slowed to 1.7% in January
- An RBI rate cut is unlikely to spur investment demand in Indian economy due to the impending elections
New Delhi: India’s retail inflation quickened in February but remained within the central bank’s comfort zone, while factory output weakened in January, leaving enough space for the Reserve Bank of India (RBI) to cut its repo rate on 5 April for the second straight time this year.
Data issued by Central Statistical Organisation (CSO) shows retail inflation accelerated to a four-month high of 2.57% in February from a revised 1.97% a month ago, while factory output slowed to 1.7% in January from 2.5% in the previous month.
Though deflation in vegetables, pulses and sugar is waning slowly, pushing up retail inflation, core inflation softened to 5.55% in February from its peak of 6.13% in June last year. Among use-based groups in the Index of Industrial Production (IIP), output of capital goods contracted, suggesting weak investment demand. Electricity output growth slowed to a 43-month low of 0.8% in January.
With inflation remaining below RBI's target, decline in inflationary expectations and weakening of growth profile, the central bank might front-load its monetary easing in the beginning of 2019-20, said Devendra Kumar Pant, chief economist at India Ratings and Research. “However, with capacity utilization still low at 74.8% and pending elections in April-May, it is unlikely to spur investment demand in the economy."
RBI’s monetary policy committee (MPC) on 7 February changed its policy stance from calibrated tightening to neutral and cut the repo rate by 25 basis points amid benign headline retail inflation and slowing global growth.
One basis point is one-hundredth of a percentage point.
The shift in the stance of monetary policy provided flexibility and the room to address challenges to sustained growth of the Indian economy over the months ahead, as long as the inflation outlook remained benign, RBI governor Shaktikanta Das said at that time.
Das met bankers last month to nudge them to cut rates after conceding that monetary policy transmission was a concern for RBI. The bankers were, however, reluctant to immediately pass on the benefits of the repo rate cut, holding that deposit rates remained elevated and the liquidity situation was tight.
However, the recent move by the State Bank of India (SBI) to link interest rate on savings bank deposits and short-term loans above ₹1 lakh to RBI repo rate is seen as a move towards quicker monetary policy transmission. Another round of RBI rate cuts in such a situation might compel banks to pass on the benefit of cheaper cost of funds, analysts said.
The base effect for IIP, which turned adverse starting November, is expected to continue for the rest of the year ending 31 March. India’s gross domestic product (GDP) growth slowed to a five-quarter low of 6.6% in the December quarter and is expected to further slow to 6.4% in the March quarter.
“We still believe there is an even chance of a rate cut in the next policy, as GDP growth and IIP growth have come in lower, which will make MPC consider giving further impetus to growth," said Madan Sabnavis, chief economist at CARE Ratings.