Low inflation fuels rate cut hopes

Retail and wholesale inflation slowed in October due to lower food prices with analysts predicting a further declining trend due to a demonetisation move, leading the central bank to cut rates in its next review meeting slated for November 30.

Growth in the Wholesale Price Index slowed to 3.4 per cent and in the Consumer Price Index dipped to a 14-month low of 4.2 per cent

The Consumer Price Index registered a growth of 4.4 per cent in September, and the slowdown of retail inflation since then can be attributed almost entirely to easing food inflation. The food and beverages category grew 3.7 per cent in October compared with 4.1 per cent in September.

Rate cut

The easing of inflation across both indices lends hope of a rate cut by the Reserve Bank of India, according to analysts.

“Inflation at the retail level continues to head down giving more hope to a possible rate cut in the coming months especially in light of the recent move to demonetise,” Rishi Shah, economist at Deloitte India said. “The internals of the overall print have come in line with expectations with food inflation moving down and key components such as vegetables and pulses also showing a decline in inflation levels.”

“There could be further softening in the inflation in the near-term, as demand side is likely to get impacted due to demonetisation,” Vaibhav Agrawal, Vice President – Research & Head of Research, Angel Broking said. “This raises the probability of a rate cut coming in earlier than expected.”

Inflation in the pan, tobacco and intoxicants category of the CPI accelerated to 7.1 per cent in October from 6.8 per cent in September. Similarly, inflation quickened marginally in the clothing and footwear category to 5.24 per cent in October from 5.2 per cent in September.

Inflation in the fuel and light segment slowed to 2.8 per cent in October down from 3.07 per cent in September.

On the other hand, the housing segment saw inflation slowing marginally to 5.15 per cent in October from 5.18 in September.

Slowing WPI

In the wholesale price index, the primary articles category saw inflation slowing to 3.3 per cent in October from 4.8 per cent in September. Within this, inflation in the food articles category slowed to 4.3 per cent from 5.75 per cent over the same period. The non-food category saw inflation slowing even more drastically to 1.13 per cent in October from 4.5 per cent in September.

“The deceleration in WPI inflation for the seventh successive month was led primarily by the softening of the prices of food and primary items, which is along expected lines,” Chandrajit Banerjee, Director General, CII said.

“CII believes that going forward, both the wholesale and retail price inflation are likely to remain muted as favourable monsoon would augment food supplies in the marketplace and international commodity prices would continue to remain under pressure,” he said.

The fuel and power segment, however, saw inflation accelerating to 6.2 per cent in October compared with 5.6 per cent in September. Notably, inflation in the manufactured products segment accelerated to 2.7 per cent compared with 2.5 per cent over the same period.

“Overall, we expect inflationary pressures to remain capped in the near term on account of a further downward bias from the move to discontinue notes of higher denominations,” Mr. Shah of Deloitte said.