Slowdown in Inflation Makes Case for Rate Cut before Christmas
Rapidly cooling inflation is building the case for the Reserve Bank of India (RBI) to cut interest rates as soon as its next monetary policy meeting on December 2, say economists. Consumer prices rose a slower-than-expected 5.5 percent on year in October, following a 6.5 percent increase in the previous month, led by a fall in local food prices. This was the slowest pace since the index was launched in January 2012. Inflation is now well below the central bank’s target of 8 percent for January 2015 and even dropped below the 6 percent target for January 2016. The data indicates "interest rate cuts are likely to come onto the agenda sooner than most currently seem to expect, perhaps even as early as the RBI’s next meeting in December," Shilan Shah, India economist at research firm Capital Economics wrote in a note. Consensus expectations are for the first rate cut to come in the second quarter of next year, according to Capital Economics. India’s benchmark repo rate has been unchanged since January, when the central bank increased it by a quarter percent point to 8 percent. Shah is not alone in his rate outlook. "The data is in line with our view that the RBI will cut rates in December," Dariusz Kowalczyk, senior economist and strategist, Asia ex. Japan, Crédit Agricole said in a note published after the inflation figures were released.
Not so fast However, not all economists were convinced the recent let up in price pressures would be enough to make the central bank budge. "The recent moderation in CPI inflation and our expectation of continued disinflation in 2015 does not change our view on monetary policy," said Sonal Varma, chief India economist at Nomura. "In our view, the RBI is focused on ensuring that inflation remains low even as the growth cycle starts to pick up in 2015-16. This requires continued vigilance from the RBI given elevated inflation expectations in India," she said. "It also requires not overreacting to any short-term undershooting on inflation for cyclical reasons." Tushar Poddar, managing director, Global Macro Research at Goldman Sachs, has a similar stance, noting that while easing inflation increases the probability that the "RBI may start giving a larger weight to growth concerns rather than a single-minded focus on inflation", December is too soon for a rate cut. "Given the helpful base effects in the October and November readings, still elevated inflation expectations, as well as uncertainty regarding the sustainability of weak commodity prices, we expect the RBI to remain on hold in the December meeting," he said.
Helped by softening prices of food items, the retail inflation declined to 5.52 per cent in October, the lowest since the new series of data was introduced in January 2012. This is the fourth consecutive month of decline in the Consumer Price Index based inflation or retail inflation which had fallen to 6.46 per cent in the previous month.
Numbers Do Not Lie: Food Inflation Decline Comes As a Relief
The overall food inflation measured on CPI came down to 5.59 per cent in October as against 7.67 per cent in the previous month. Retail prices of vegetables declined by 1.45 per cent as against a rise of 8.59 per cent in September, according the data released by the Ministry of Statistics and Program Implementation. Inflation in fruits slowed to 17.49 per cent from 22.4 per cent in September. Similarly the rate of price rise in protein rich items like eggs, fish and meat was at 6.34 per cent in October, slightly down from 6.35 per cent in the previous month. The data on inflation based on Wholesale Price Index for October will be released on Friday. WPI inflation had dropped to a near five-year low in September to 2.38 per cent, helped by moderation in food and fuel prices. The Reserve Bank has of late started targeting retail inflation, while deciding on its bi-monthly monetary policy. RBI has been targeting a retail inflation of 8 per cent by March 2015 and 6 per cent by March 2016. "The inflation data is very encouraging. It is little below what the market was expecting. Lower base rate and softening food prices also helped. "It is building a case for a rate cut. But whether the Reserve Bank will do in December or not, it is a little more wait and watch, but a rate cut is very possible," said Abheek Barua, Economist with Indian Council for Research on International Economic Relations (ICRIER). Retail inflation in cereals and products also came down to 6 per cent in October from 6.42 per cent in the previous month. For pulses and products it went up a tad to 7.51 per cent from 7.18 per cent in September. Inflation in the category of fuel and light also softened to 3.29 per cent during the month, and milk and milk products the rate of price rise was at 10.79 per cent as against 11.08 per cent. The rate of price rise in non-alcoholic beverages was 5.64 per cent; food and beverages 5.68 per cent and sugar 0.37 per cent. The data further showed that consumer inflation came down to 5.55 per cent in urban India and 5.52 per cent in rural parts during October. In the previous month of September, the respective figures stood at 6.34 per cent and 6.68 per cent.