India’s annual retail inflation eased in June to its slowest pace in more than five years, as food prices fell, building pressure on the central bank to cut interest rate when it meets for a monetary policy review on August 2.
The consumer price index rose 1.54% in the 12 months through June, down from an increase of 2.18% in the previous month and slower than the forecast of economists in a Reuters poll, data released by the Ministry of Statistics showed on Wednesday.
Economists in a poll had predicted inflation to ease to 1.7% last month.
This is the lowest inflation rate since India started releasing retail inflation data in January 2012 based on a combined CPI index for rural and urban consumers.
Elsewhere in Asia, China’s annual consumer prices remained subdued at 1.5% in June.
With headline inflation remaining below the Reserve Bank of India’s mid-term target of 4% for the past eight months, industry participants and the government have sought a cut in interest rates to support economic expansion.
Economists expect that the central bank to cut interest rates in its next policy review.
The economy grew at an annual 6.1% in January-March quarter, the weakest growth since late 2014, hit by Prime Minister Narendra Modi’s surprise decision to scrap 86% of the currency in circulation in November.
Some analysts, though, say an increase in charges of services after the launch of a new tax system this month, could push up core inflation, which excludes food and energy prices, and has remained stubbornly stayed above 4 percent for years.
Separately, industrial output grew 1.7% in May from a year earlier, data showed.
The pace of expansion, however, was slower than a revised 2.8% annual rise in April and compared with a 1.9% growth forecast by economists in a Reuters poll.
Bumper foodgrains
Analysts say expected good rains this year could lead to bumper grain production and a further slide in food prices in Asia’s third largest economy.
Retail food prices fell 2.12% last month from a year ago, compared with a 1.05% fall in May. Falling food prices present a worry for the government because of the hit on millions of farm households.
The central bank now expects retail inflation to come in a 2.0-3.5% range for the first half of fiscal year 2017/18 and 3.5-4.5% in the second half, down from 4.5% and 5.0%, respectively.
Expert opinions
“The continued softness in core inflation should comfort the MPC that underlying price pressures have eased, in addition to the collapse in food prices over the past few months.
Accordingly, we expect the MPC (monetary policy committee) to cut the repo rate by 25 bps in their August review.
Subsequently we expect the MPC to be on a wait and watch mode through this financial year. We expect headline inflation to top around 4 percent by March 2018 as food inflation reverts to more normal levels.
Further price data is likely to be clouded by both GST (goods and services tax) and government house rent allowance increases.
Lastly, with major central banks likely starting to contract balance sheets by last quarter of this calendar year, global financial markets could turn more volatile from hereon. Taking all this into consideration the MPC would prefer to stay on sidelines after easing rates in August.”
“Given the current inflation trajectory we reiterate our call of a 25 basis points rate cut in August policy.
The momentum of overall inflation will pick-up slightly from August given higher housing allowances but it is unlikely to pose any upside risk to the upper band of RBI’s 3.5-4.5 percent inflation target in the second half of the year (October-March).
Core inflation is at a series low since 2012, which might go up slowly but we don’t see any sharp upside as a pick-up in demand is still not robust and the output gap is negative.”
“It is slightly higher than my expectations. I was at 1.4%, and that is largely because of vegetable prices. I was expecting the increase to be on the lower side.
Otherwise, we do expect a rate cut of 25 basis points in the August policy. There is a significant possibility that overall inflation will be significantly lower than RBI’s forecast. Unless, there is some major disappointment in monsoon, I don’t see any upside risk to inflation by March 2018.”
“RBI does not believe that GST will increase inflation yet, but if you observe other countries where GST was implemented, it definitely created an upward pressure on inflation.
We also have the 7th Pay Commission which increased the house rent allowance (HRA). Both factors would create upside risk for the baseline inflation.
The RBI will be monitoring the progress of GST and the monsoon this year.”
“This print will provide room for RBI to cut repo rate by 25 bps, but scope for further rate cuts would be restricted as the RBI would likely wait-and-watch the impact of HRA (house rent allowance) increases over the next few months.
Recent increase in vegetable and cereals prices would also keep the RBI cautious. Further, developed markets have been signalling a reversal in their policy stances for some time.