Retail Inflation Falls Close To 4% Target

A strong monsoon continues to pull down inflation with both consumer price inflation and wholesale price inflation easing in October. Data released by the government shows that retail inflation fell to 4.20 percent in October compared to 4.39 percent in September. Retail inflation has fallen steeply from 6.07 percent in July to just above 4 percent now as prices of food and non-food articles has cooled. At

current levels, inflation is well below the Reserve Bank of India’s target of 5 percent inflation by March 2017 and is now approaching the medium term target of 4 percent (+/- 2 percent).

Inflation in the food and beverages category fell to 3.71 percent from 4.12 percent in September. The price index for vegetables fell 5.74 percent in October compared to a 7 percent decline in the previous month.

Inflation remained sticky in some other categories which are part of the core inflation basket.

For instance, housing inflation was at 5.15 percent in October compared to 5.18 percent the previous month.

Earlier on Tuesday, a separate report showed that wholesale price inflation fell to 3.39 percent in October compared to 3.57 percent in September.

Manufactured Goods Inflation On The Rise?

While headline inflation is moderating, there are some early signs of a pick-up in the prices of manufactured goods.

Non-food manufacturing inflation (or core manufacturing) rose for the fourth consecutive month, reaching a 22-month high, noted Yes Bank in a report following the release of the wholesale price inflation data.

The improvement in non-food manufacturing inflation indicates rising pricing power of producers, which is expected to support corporates nominal sales growth. Support to producers from lower input costs has reduced with a rise in commodity inflation (ex. Mineral oils) by 0.4 percent year-on-year in October versus a decline of 0.7 percent year-on-year in September.

Yes Bank Report

Case For Rate Cut?

Most economists are of the view that there is scope for more rate cuts since inflation remains below the central’s target for the current year. Also the RBI, under Urjit Patel, has indicated greater flexibility in managing inflation compared to previous governor Raghuram Rajan. Patel seems comfortable maintaining inflation in the band of 4 percent (+/- 2 percent) while Rajan was steadfast on bringing down inflation to 4 percent by March 2018.

However, the government’s move to scrap Rs 500 and Rs 1,000 currency notes could change expectations. With the banking sector flush with liquidity as deposits flow into banks in the aftermath of the government’s decision, market and bank lending rates are already on the decline.