Wednesday, 14 June 2017

Record Low Inflation in May Spurs Rate Cut Hopes by RBI

India’s retail inflation gauge slumped further in May, hitting a record low amid a sharp drop in kitchen staples, leaving lingering doubts about whether the Reserve Bank of India (RBI) tightened its monetary policy stance too early.

According to the data released by the statistics office, consumer inflation, the benchmark price gauge of the RBI, eased to a record low of 2.18 per cent in May from 2.99 per cent in April. It was 5.76 per cent during the corresponding period last year.

The data would confirm expectations that inflation is running well below the central bank's estimates, adding pressure on the RBI to reduce interest rates during its next policy meeting in August to boost economic growth.

The RBI last week kept the benchmark repurchase rate unchanged at 6.25 per cent in a policy review and slashed its inflation forecasts, acknowledging that price pressures were weaker-than-anticipated, but declined to ease its 'neutral' policy stance amid concerns that inflation may rebound and move close to its 4 per cent medium-term target by the end of the year.

Asia’s third-largest economy is facing a decline in inflation amid cooling food prices. The consumer food price index declined 1.05 per cent in May, compared to a year ago period, led by an almost 20 per cent fall in the prices of pulses and products. Price of vegetables too fell 13.4 per cent from a year ago.

Further, India's wholesale prices also cooled in May. WPI inflation in May was 2.17 per cent compared with 3.85 per cent in April. Similar to retail inflation, the drop in the wholesale inflation is attributed to easing food prices.

Going forward, a good monsoon is expected to keep a lid on food prices and overall inflation, which may force RBI to shift its attention to growth. India's GDP growth slipped to 6.1 per cent in quarter ended March, the lowest in more than two years, as the economy struggled with the effects of November's demonetisation. 
Latin Manharlal

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