Inflation Falls To 5-Year Low, Chief Economic Advisor Makes Case For Rate Cut

Economists polled by Reuters had predicted consumer inflation to cool to 1.70 per cent in June.

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Inflation Falls To 5-Year Low, Chief Economic Advisor Makes Case For Rate Cut

Inflation hit the lowest level since the series began in 2012

Highlights

  1. Consumer inflation fell to a record low of 1.54% in June
  2. It was the lowest since 2012 and below RBI's target of 4%
  3. Industrial output growth in May fell to 1.17% from 3.1% in April
Consumer inflation fell to a record low of 1.54 per cent in June, easing further from May's 2.18 per cent, after a drop in food prices. This is the lowest level of inflation since the series began in 2012 and also below the Reserve Bank of India's medium-term target of 4.0 per cent for an eighth successive month. This could increase pressure on the RBI for an interest rate cut. The central bank kept its benchmark interest rate unchanged in June but softened its hawkish stance following a drop in retail inflation. The next meeting of the RBI's Monetary Policy Committee is scheduled next month.

Economists polled by Reuters had predicted consumer inflation to cool to 1.70 per cent in June. Food and beverage price index, which accounts for nearly half the Consumer Price Index (CPI) basket, contracted 1.17 per cent in June. Among food items, vegetables prices fell 16.53 per cent in June as compared to year earlier levels while rates of pulses fell nearly 22 per cent. And with monsoon expected to be normal this year, food inflation is likely to remain in check. Weather office IMD or India Meteorological Department said last week that the cumulative rainfall between June 1 and July 2 was 6 per cent above the long-run average.

Making a case for the Reserve Bank of India to cut interest rate, Chief Economic Advisor Arvind Subramanian said: "The latest CPI number...of 1.54 per cent is historically low and reflects the firm and ongoing consolidation of macro-economic stability... Clearly, this low number and what it implies about underlying price measures - as well as the latest IIP (Index of industrial Production) data just released - is something that, I am sure, all policy makers will reflect upon very very carefully."

"This low, heartening number is consistent with our analysis for some time now - and which will be fully elaborated in the forthcoming Survey - of a paradigm shift in the inflationary process to low levels of inflation - a shift that I think has been missed by all reflected in the large, one-sided, and systematic inflation forecast errors that have been made," Mr Subramanian said.

The RBI is expected to cut its key policy rate by 25 basis points in its review meet on August 2, Bank of America Merrill Lynch had earlier said in a report. However, some economists say that the RBI could still remain cautious, watching out for the impact of the goods and services tax (GST), which came into force on July 1, though food products were exempt from taxes under the new indirect taxation system.

"This print will provide room for RBI to cut repo rate by 25 bps, but scope for further rate cuts would be restricted as the RBI would likely wait-and-watch the impact of HRA (house rent allowance) increases over the next few months," says Suvodeep Rakshit, senior economist at Kotak Institutional Equities. Recently, the Cabinet had approved a hike in allowances for central government staff.

The RBI will also be monitoring the progress of GST and the monsoon this year, said Udhakar Pattabiraman, head of research operations at William O'Neil India.

In its June policy review, the central bank had lowered its headline inflation forecasts to a range of 2-3.5 per cent for the first half of fiscal year 2017-18 and 3.5-4.5 per cent for the second half, down from 4.5 per cent and 5.0 per cent, respectively.

Another set of macro-economic data released on Wednesday showed that industrial output growth slowed to 1.7 per cent in May, from a revised 2.8 per cent growth in April. The deceleration in factory output growth could further bolster the case for a rate cut next month to boost Asia's third-largest economy, which grew 6.1 per cent in the January-March quarter - its weakest pace in more than two years.

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