Retail inflation dips but rate cut unlikely soon

  • HT Correspondent, Hindustan Times, New Delhi
  • Updated: Feb 13, 2014 01:40 IST

India’s retail inflation eased to a two-year low of 8.79% in January on the back of sharply falling food prices. Within food, vegetable prices fell most, boosted by the arrival of fresh seasonal supplies.

Food inflation that eased to a 22-month low of 9.9% led to the decline in headline inflation.

Industrial output, on the other hand, shrunk by 0.6% in December, the third successive month of contraction.

So, will the Reserve Bank of India (RBI) cut rates to boost investment. May not be right now.

Conventional economic logic suggest that in times of falling inflation and industrial output, the central bank should start unwinding its tight monetary policy and slashing rates.

The Reserve Bank of India (RBI) has raised it key repo, or lending rate, three times in the last five months, to tame inflation by cooling demand. This has raised home loan equated monthly installments (EMIs).

But there could be a few devils hiding in the detail.

Despite sluggish demand for goods as seen from weak car sales, non-food, non-fuel inflation inched up to 8.1% in January from 8.0% in December.

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RBI governor Raghuram Rajan has clearly stated on which side of the fence the central bank is on the inflation-versus-growth debate.

According to experts, the RBI’s stated objective to bring down inflation to 6% by January 2016 leaves little room for rate reductions.

“We believe that achieving 8% inflation by January 2015 is feasible if the recent downward momentum in food inflation continues and non-food inflation moderates. A firm commitment to lowering CPI inflation to 6% by 2016 level will imply little room for monetary policy loosening in the next fiscal year, despite weak domestic demand,” according to credit rating and research firm CRISIL.

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