Opinion Inflation is down — but wait for GDP data

In October last year, retail inflation had breached the upper threshold of the RBI’s inflation-targeting framework. Since then, however, it has moderated sharply. The latest data show that inflation slumped to a low of 0.25 per cent in October this year. In large part, the decline has been due to softening food prices, vegetables in particular. Food inflation in October is, in fact, the lowest of the current index series. With this data, inflation has now averaged 1.92 per cent in the first seven (April-October) months of the year. This raises the possibility of inflation for the full year coming in even lower than the RBI’s most recent forecast of 2.6 per cent.

The deflation in the food category has widened further. The year-on-year inflation rate based on the food price index was -5.02 per cent in October, down from -2.33 per cent in September. The sharpest falls were observed in vegetables and pulses — potato, onion, tomato and arhar/tur, in particular. The softening in food prices is likely to continue given the ample supply from rebuilding of wheat and sugar stocks, prospects of a good kharif crop, and low international prices. In the non-food category, inflation remains subdued in most segments, with the exception of personal care and effects. The rise in this category could be due to the surge in gold prices — 57 per cent in October. The central bank had earlier estimated that excluding precious metals, core inflation was at 3 per cent in August. The rationalisation in GST rates could also have played a role. But, as per economists at the Bank of Baroda, the pass through is incomplete, and the full impact should be visible by November. This, however, is the last inflation data before the next monetary policy committee meeting in December.

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The central bank has been consistently overestimating the price pressures in the economy. As a consequence, it has had to repeatedly lower its inflation forecast for the year — from 4.2 per cent in February to 3.7 per cent in June to 2.6 per cent in October. The muted price pressures in the economy do indicate the space to lower rates further. The GDP data for the second quarter will be released by the end of the month. It will provide some understanding of the underlying growth momentum in the country. These data will influence the MPC’s decision to cut rates or not.