Wednesday, 14 December 2016

Demonetisation Effect: Inflation Cools to 2-yr Low in November

India's retail inflation eased significantly last month after Prime Minister Narendra Modi's shocking demonetization drive dented the consumer spending, fuelling hopes of an interest rate cut by the Reserve Bank of India at its next policy review in February 2017.

According to the data released by statistics office, consumer inflation, the benchmark price gauge of the RBI eased to its lowest level in two years to 3.63 per cent in November from 4.20 per cent in October. It was 5.41 per cent during the corresponding period last year.

The fall in in the inflation was primarily due to sharp slowdown in food prices which registered its fourth consecutive month of decline, coming in at 2.11 per cent in November from 3.32 per cent in October.

In addition, Inflation rate based on wholesale price index (WPI) also decelerated for the third consecutive month to 3.15 per cent in November from 3.39 per cent a month ago, as a squeeze in cash availability impacted prices of perishable commodities.
Prime Minister Narendra Modi's shocking move to cancel 500-rupee and 1,000-rupee banknotes, which accounts for 86 per cent of the cash circulating in Asia's third-largest economy, has disrupted daily life, discouraging consumer demand. The slow pace of replacing the old currency with the new Rs 500 and Rs 2,000 banknotes is expected to have led to the demand compression, which has eventually hit the small businesses.

November's reading is way below the Reserve Bank of India's (RBI) 5 per cent inflation target for March 2017 as well as the medium-term target of 4 per cent. The monetary policy committee headed by RBI Governor Urjit Patel had earlier this month held interest rates steady and said demonetisation of high value currency notes could lower prices of perishables and reduce CPI inflation by 10-15 basis points by December.
With this sharp slowdown in inflation, there is room for further rate cuts by RBI in the next policy meeting. However, before penciling in RBI's next move, the economists are eyeing the advance estimates of GDP and the December CPI numbers.  

Latin Manharlal Group

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