Home >Politics >Policy >Inflation within range, another interest rate cut by RBI in sight

NEW DELHI : India’s retail inflation marginally accelerated to an eight-month high in June, but remained within the central bank’s comfort level, while factory output decelerated in May, raising hopes of yet another round of policy rate cut next month.

Data released by the National Statistical Office (NSO) showed retail inflation grew 3.18% in June compared to 3.05% a month ago, while factory output, measured by the index of industrial production (IIP), decelerated from an upwardly revised 4.3% in April to 3.1% in May.

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Ahead of the monetary policy review on 7 August, Reserve Bank of India (RBI) governor Shaktikanta Das on Monday praised the commitment to fiscal consolidation in the budget presented by finance minister Nirmala Sitharaman, raising hopes of a fourth consecutive policy rate cut next month.

After the customary post-budget meeting between officials of the finance ministry and RBI, Das said the central bank will “always be happy" when fiscal deficit is maintained.

“The RBI will be happy mainly because it limits the so-called crowding out effect. So, that is something very positive because it gives more space for private sector borrowing," Das told reporters.

In her maiden budget, Sitharaman stuck to the path of fiscal consolidation, promising to narrow the fiscal deficit to 3.34% of gross domestic product (GDP) in FY20 from 3.37% of GDP in FY19.

Devendra Kumar Pant of India Ratings said while prior to the budget, the odds of an interest rate cut in August were evenly balanced, post-budget, the odds are in favour of a cut. “However, in the absence of quick monetary policy transmission, it is unlikely to spur consumption and investment activities in the economy in the short run."

Last month, RBI cut policy rates for the third consecutive time by 25 basis points and changed its stance to accommodative from neutral, signalling that more rate cuts were in store to revive growth and support faltering consumer demand.

India’s economy slowed to a near five-year low of 5.8% in the March quarter, forcing RBI to revise its growth projection for 2019-20 to 7% from 7.2% estimated earlier.

RBI said it expects economic growth at 6.4-6.7% from April to September, accelerating to 7.2-7.5% during October-March. In 2018-19, India’s economy grew at 6.8%.

Barring electricity, which grew at a robust 7.4%, two other sectors in IIP—mining (3.2%) and manufacturing (2.5%)—witnessed a sequential slowdown. Among use-based classification, except consumer non-durables (7.7%), growth in all other sectors declined sequentially.

Madan Sabnavis, chief economist at Care Ratings, said that future growth in factory output will be statistically under pressure due to a high base effect in the coming months.

“While we can target growth of 4-5% for the year, a lot will depend on the second half of the year when demand can pick up. Monsoon progress will be important here," he added.

Passenger vehicle sales fell the most in nearly two decades in the June quarter, underscoring subdued consumer sentiment and a slowdown in economic activity.

A total of 712,620 cars, utility vehicles and vans were sold during the quarter, down 18.4% from a year earlier, according to data released by Society of Indian Automobile Manufacturers. It was the sharpest decline since the 23.1% drop in the third quarter of 2000-01.

The trajectory of food inflation and rural demand will depend largely on the distribution of the south-west monsoon.

Rainfall deficit declined to 12% on Friday from 33% at the end of June.

Food inflation picked up from 1.83% a month ago in June to 2.17%. However, core inflation slowed from 4.25% in May to 4.11% in June. The item groups that grew at a faster rate include services (4.45%), housing (4.84%), pan, tobacco (4.11%), vegetables (4.66%) and pulses (5.68%).

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