Economy

Retail inflation falls to 6.58%; factory output goes up 2%

Our Bureau New Delhi | Updated on March 12, 2020 Published on March 12, 2020

The decline in the prices ofl vegetables ed to the rate of retail inflation falling 31.6% from over 50% AP   -  AP

Taking a cue from the US Fed, RBI likely to cut policy rates

With fall in vegetable prices, especially onion, the rate of retail inflation has fallen by over one percentage point in February. Though it is higher than the targeted level of inflation, there is a strong possibility of reduction in policy rates.

However, there has been some improvement on the industrial sector front; it grew 2 per cent in January against near flat in December.

Rate of retail inflation, as measured by the Consumer Price Index (CPI), slipped to 6.58 per cent in February from 7.59 per cent in January. For food, the rate saw a deeper decline, with the all India inflation rate down to 10.81 per cent in February from 13.63 per cent in January. As a result of the decline in the prices of vegetables, the rate of inflation came down to 31.6 per cent from over 50 per cent.

However, prices of pulses are still an area of concern as the rate of retail inflation hovers over 16.5 per cent. There are expectations that with the arrival of fresh crop, supply will improve and prices will moderate.

Higher than targeted rate

Meanwhile, even as rate of retail inflation has come down, it is higher than the upper limit of targeted inflation. As a result of an agreement between the Centre and the Reserve Bank of India (RBI), the range of targeted rate of inflation is 2-6 per cent (median rate of 4 per cent with 2 per cent swing in both directions). Normally, the Monetary Policy Committee (MPC), led by the RBI Governor, reviews the policy interest rate on the basis of the targeted rate.

With retail inflation on high side and fears over the coronavirus pandemic, the MPC is expected to lower the policy rate. The Fed has lowered the rate and the MPC is expected to take a cue from this and cut the rate for providing stimulus. After cutting policy rate by 135 basis points (100 basis points mean 1 percentage point) in 2019, MPC went for pause.

Relief in sight

Aditi Nayar, Principal Economist at ICRA, felt that the extent of reduction in the headline CPI inflation in February, combined with an unchanged core print, will provide some relief and increase the possibility of an upfront rate cut in the April 2020 policy review, in the light of the burgeoning risks to global and domestic growth.

“We expect the fall in crude oil prices to feed into retail diesel and petrol prices in a lagged manner over the next few fortnights, which could subsequently reverse as prices stabilise. However, prices of items such as medicines may spike in the near term, which would prevent a sharper moderation in the core CPI inflation. Overall, we expect the CPI inflation to recede to below 6 per cent in the ongoing month, led by food and fuel,” she said.

Mining-led growth of the industrial sector in January (a 4.4 per cent rise) was because of a 1.5 per cent growth in manufacturing and over 3 per cent in electricity. Eleven out of the 23 industry groups in the manufacturing sector have shown positive growth during January compared to the corresponding previous period. The industry group ‘manufacture of tobacco products’ has shown the highest positive growth of 22.8 per cent followed by 14.1 per cent in ‘manufacture of basic metals’ and 9.0 per cent in ‘manufacture of furniture.’

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Published on March 12, 2020
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