Consumer Inflation Falls To Record Low, RBI Rate Cut On Cards

Expectations of inflation remaining subdued have strengthened after the weather office forecast an above-average monsoon rainfall this year.

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Consumer Inflation Falls To Record Low, RBI Rate Cut On Cards

Monday's was the lowest inflation reading since the current consumer inflation series was launched

Highlights

  1. Analysts expect RBI to cut interest rate at its policy meet in August
  2. Lower food prices helped bring down overall consumer inflation
  3. Pulses and vegetable prices saw a sharp fall
Consumer inflation cooled to record low of 2.18 per cent in May, dipping from 2.99 per cent in April, led by a fall in food prices. That boosted expectations the Reserve Bank of India (RBI) could cut rate interest rate at its next policy meet in August. This is the lowest inflation reading since the government started publishing an economy-wide consumer price index in 2012. Expectations of inflation remaining subdued have strengthened after the weather department - India Meteorological Department (IMD) - forecast an above-average monsoon rainfall this year. A good June-September monsoon, which delivers about 70 per cent of India's annual rainfall, will help drive higher food and grain production, thus keeping food inflation in check.

Retail food prices fell 1.05 per cent in May from a year ago, compared with a 0.61 per cent gain in April. The fall in food prices was driven by cheaper vegetable and pulses which saw sharp price falls on a year-on-year basis.

Gaurav Dua, research head at domestic brokerage Sharekhan, said, "RBI had indicated that inflation in first half would be between 2.5 - 3.5 per cent and this is lower than that also. This clearly shows that the risk is on the downside. This opens up scope for a rate cut in August."

The RBI last week kept its benchmark interest rate unchanged while softening its hawkish stance on inflation. The central bank lowered its headline inflation forecasts to a range of 2.0-3.5 per cent for the first half of fiscal year 2017-18 and 3.5-4.5 per cent in the second half, down from 4.5 per cent and 5 per cent, respectively.

Economists say the RBI is waiting to see if inflation remains low, especially after the implementation of a goods and services tax or GST from July 1. The central bank tweaked its language in the latest statement to say risks were evenly balanced.

Calls for rate cut have grown after the economy grew at a slower-than-expected 6.1 per cent in the January-March quarter, its slowest pace in more than two years and down from 7 per cent in the previous quarter.

Separately, industrial or factory output growth rose 3.1 per cent in April, accelerating from 2.7 per cent growth in March.

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