Cash crunch squeezes retail inflation to 2-year low; hits 3.63% in November

K. R. Srivats New Delhi | Updated on January 16, 2018 Published on December 13, 2016



Raises hope of RBI policy rate cut

Retail inflation, measured by consumer price index (CPI), fell to a two-year low in November 2016 at 3.63 per cent, as depressed consumer demand owing to Prime Minister Narendra Modi’s abrupt move of November 8 to remove high-value banknotes disrupted daily life.

The latest CPI print — well below the Reserve Bank of India’s five per cent inflation target for March 2017 — has raised hopes of central bank going in for a repo rate cut at its next monetary policy review meeting.

The note ban had a telling effect on food articles inflation — 47 per cent weight in CPI —which declined to 2.11 per cent in November from October’s 3.32 per cent. Food articles inflation in November last year stood at 6.07 per cent.

Overall CPI inflation had come in at 5.41 per cent in November last year and 4.20 per cent in October 2016.

For the month under review, urban CPI inflation came in at 3.05 per cent (4.71 per cent in November 2015). Rural CPI inflation for the month under review stood at 4.13 per cent (5.95 per cent).

In October this year, urban CPI inflation had touched 3.54 per cent, while rural CPI inflation had touched 4.78 per cent in the same month.

Experts’ views

Aditi Nayar, Principal Economist, ICRA Ltd, said dearth of cash is likely to have hindered price discovery at the Mandi level.

Following demonetisation, food prices are likely to have fallen more sharply at the wholesale price level than at the retail level, which saw a sequential moderation of 0.7 per cent. “Therefore, we expect a sharper correction in WPI inflation in November 2016 compared with CPI inflation,” she added.

Rishi Shah, Economist, Deloitte India, said the fall in retail inflation seems to be on the back of a favourable base effect coupled with some downside due to the demonetisation move.

The fine print shows that a decline in prices of perishables such as fruits and vegetables have had a major impact.

“Overall, the number is likely to remain below the RBI’s threshold of five per cent for March 2017 in the coming months and should pave the way for another 25 bps cut in the coming months,” Shah added.

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Published on December 13, 2016
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