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Rates of inflation for both, producers and consumer, moderated further in December. Now all eyes are on the Monetary Policy Committee (MPC), headed by RBI Governor, on whether it lowers the policy rate further or not.
Consumer’s inflation rate, based on the Consumer Price Index (CPI) slipped to 2.19 per cent in December from 2.33 per cent in November, according to a government data. This is lowest since June 2017. MPC takes CPI and inflationary expectations into cognizance before deciding change in the policy rate, which is better known as repo rate.
Since the rate is continuously below 4 per cent, there is pressure on MPC to lower the rate. According to the agreement between the government and the RBI, the targeted retail inflation is 4 per cent with movement of 2 per cent in both directions. This means inflation should be between 2 and 6 per cent.
Eyes on MPC
MPC is scheduled to announce its decision on review on February 7 after its sixth and final meeting during the current fiscal. The committee has already raised the policy rates twice to take it to 6.5 per cent. Since, inflationary expectations also appear to be moderate; there is possibility that rates could be lowered. If it happens, this will be big boost for the Government before the general poll.
One key reason for lower retail inflation is continuation of Consumer Food Price Index, better known as food inflation, still in negative zone. This rate of inflation recorded (-) 2.51 per cent for December as against (-) 2.61 per cent in November. This shows that price level for farm products have not accelerated, which is not good news for the farmers.
Earlier in the day, the Commerce and Industry Ministry released data for producers’ inflation, based on wholesale price index (WPI). This rate of inflation, stood at 3.80 per cent for the month of December as compared to 4.64 per cent (provisional) for the previous month and 3.58 per cent during the corresponding month of the previous year. The latest rate is eight month low. Build up inflation rate in the financial year so far was 3.27 per cent compared to a build up rate of 2.21 per cent in the corresponding period of the previous year.
Industry bodies are optimist that lower inflation will pave the way for rate reduction. Chandrajit Banerjee, Director General of CII said that fall in both inflation rates would help boost sentiments. “The decline in the inflation reading, which is well within the Central Bank’s medium-term inflation target, should induce the RBI to resume the accommodative policy stance to trigger the investment cycle and support growth by lowering the borrowing costs of industry,” he said.
Similar sentiments were echoed by another industry chamber, ASSOCHAM. “The continuing deceleration in the growth of WPI and softening of global fuel prices provide ample opportunity to MPC (monetary policy committee) to cut down policy rate at earliest which will kick start investment and revival in overall industrial growth,” it said.
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