Thursday, 13 July 2017

Cooling Inflation Bolsters Rate Cut Hopes

India’s consumer price inflation has eased to its slowest pace in more than five years, raising demands for the interest rate cut by the Reserve Bank of India (RBI) at its policy meet scheduled in August, in order to stimulate growth in Asia’s third biggest economy.

According to Central Statistics Office (CSO) data released, consumer inflation eased to a record low of 1.53 per cent in June from 2.18 per cent in May. It was 5.77 per cent during the corresponding period last year.

With inflation number below the RBI’s mid-term target of 4 per cent for the past eight months, industry participants and the government are batting for a cut in interest rates to support economic expansion. The central bank now expects retail inflation to come in a 2.0-3.5 per cent range for the first half of FY 18 and 3.5-4.5 per cent in the second half, down from 4.5 per cent and 5.0 per cent, respectively.

Deflation in vegetables and pulses continues to bring down the headline numbers as food and beverage price index, which accounts for 45 per cent of the consumer price index basket, contracted 1.17 per cent in June. Vegetables prices slipped 16.53 per cent during the reporting month from last year, while price of pulses declined nearly 22 per cent. Analysts expect these prices to remain subdued for few more months aided by an excess supply, good monsoons and low prices globally.

On the other hand, industrial output rose 1.7 per cent in May after rising 3.1 per cent in April owing to weaker performances in manufacturing, mining and power generation. The tepid factory output data could further strengthen the case for RBI rate cut in August to support India's economy, which grew 6.1 per cent in the January-March quarter, its weakest pace in more than two years.

While the recent data may put pressure on RBI to consider a token 25 basis point rate-cut, it is not a given. Monsoons, HRA increase under the Seventh Pay Commission, temporary impact of GST, base effect trickling in, and fiscal risks coming from farm loan waivers by States can still exert upside pressure on inflation in the second half of this fiscal.

Latin Manharlal Group

No comments:

Post a Comment