Retail and wholesale price inflation eased in October on lower food inflation, brightening prospects of a rate cut by the monetary policy panel as early as December, as the government’s demonetisation move is expected to keep short-term price pressure under control.
While the consumer price index (CPI) rose 4.2 per cent in October — the lowest since August last year — wholesale price inflation dropped for a second straight month to 3.39 per cent. This CPI inflation moderation was driven by a drop in food inflation to 3.3 per cent (drop of 60 bps) — especially in vegetables, fruits and pulses. However, core inflation, a key input in monetary policymaking, inched up a tad to 5 per cent in October.
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Some analysts expect inflation to hover around 4 per cent over the next three months before rising towards the end of the fiscal once pent-up demand following demonetisation starts to stoke inflationary pressure.
The monetary policy committee (MPC) reduced the policy rate by 25bps to 6.25 per cent at its October 4 meeting.
“The black money drive will increase the pace of deceleration, specifically in the services sector, which has lot of cash transactions,” said Soumya Kanti Ghosh, chief economist at State Bank Of India.
Retail inflation may undershoot the inflation trajectory (the CPI inflation target approved by Parliament is 4 per cent+/-2 per cent until March 2021), leaving enough room for a more accommodative policy.
However, the monetary policy panel may closely watch the GDP data for the second quarter, to be released this month, before choosing to going for another round of cut, said Aditi Nayar, senior economist at ICRA.
Crisil Research wrote: “..we think the positive impact of a favourable monsoon this year is reflecting in lower food prices. Further, the recent demonetisation measure, we believe, will curb demand and put downward pressures on inflation in the
short run. Going ahead, we expect inflation to trend lower …” FE