NEW DELHI: Consumer and wholesale inflation eased in October on the back of cooling food prices but economists do not expect a rate cut by the Reserve Bank of India at its policy meeting next month.
India’s headline inflation rate based on the Consumer Price Index (combined) eased to 14 month low of 4.2% in October compared with 4.39% in September and 5% a year ago, according to official data released on Tuesday.
The country’s wholesale inflation softened to 3.39% in October from 3.57% in September, data showed. Economists, however, ruled out the possibility of the RBI cutting interest rates in December because demonetisation will flush banks with funds, which will automatically push lending rates down.
RBI had cut interest rate by 25 basis points in October. One basis point is one hundredth of a percentage point.
“CPI is higher than our expectations,” said Madan Sabnavis, chief economist at CARE Ratings. “Going ahead, retail inflation will be higher because of the demonetisation drive and farm output may get stalled in some regions due to payment issues. Vegetable prices that declined recently are already going up. The RBI may not cut interest rate in December because banks are already flushed with funds and would reduce lending rate,” he said.
Gautam Mukhopadhyay, group chief economic adviser at State Bank of India (SBI), said, “Our expectations of inflation declining to below 4% in November still holds sacrosanct.” He said demonetisation of Rs 500 and Rs 1000 denomination notes will support easing of inflation by affecting consumer demand adversely. “Hence, we are still expecting another round of repo rate cut (25-50 bps) in FY17,” Mukhopadhyay said.
The encouraging inflation number came amid almost flat industrial growth with concerns over the sustainability its recovery in the coming months after demonetisation temporarily knocks down demand.
ICRA’s senior economist Aditi Nayar said that although inflation has declined at both retail and wholesale levels, the trends revealed by the July-September national accounts would also influence the monetary policy action in December. The growth data for the last quarter will be shared on November 30. Nayar said CPI is dominated by food items, the demand for which is unlikely to fall appreciably because of demonetisation and the magnitude of cash in circulation.
Moreover, prices of various services maybe sticky and unamenable to reset during the middle of the year. “As a result, we do not expect demonetisation to have a significant downward impact on CPI inflation in immediate term,” she said.