Industry calls for rate cut by RBI as retail inflation drops to 18-month low of 2.19% in December 2018

New Delhi: Continued decline in food prices pulled down retail inflation to an 18-month low of 2.19 percent in December 2018, creating headroom for the RBI to cut interest rate in its monetary policy review next month. Another set of official data showed that the wholesale inflation too eased to an eight-month low of 3.80 percent in December on softening fuel and food prices. The inflation based on the Consumer Price Index (CPI) was 2.33 percent in November and 5.21 percent in December 2017. According to the data released by the Ministry of Statistics and Programme Implementation, food inflation remained in the negative zone at 2.51 percent compared to (-) 2.61 percent in November. The rate of price rise in vegetables, fruits and protein-rich eggs continued to decline. However, there was a marginal increase in the prices of meat, fish, and pulses. Fuel and light inflation was 4.54 percent in December, down from 7.39 percent in November on back of reduction in prices of petrol and diesel. [caption id=“attachment_4225879” align=“alignleft” width=“380”]  Representative image. Reuters.[/caption] The Reserve Bank of India, which mainly factors in retail inflation, has been tasked by the government to maintain the inflation near 4 percent. The central bank, under new Governor Shaktikanta Das, is scheduled to announce the next set its bi-monthly monetary policy on 7 February and industry expects that it will cut the key lending rate. Commenting on the data, industry chamber CII said the decline in the inflation reading, which is well within the Central bank’s medium-term inflation target, should induce the RBI to resume the accommodative policy stance to trigger the investment cycle and support growth by lowering the borrowing costs of industry. The factory output based on movement in Index of Industrial Production (IIP) slumped to a 17-month low of 0.5 percent in November on account of contraction in the manufacturing sector, particularly consumer and capital goods. Another industry body Assocham also made a case for easing of policy stance by the RBI. In its December monetary policy review, the RBI had kept interest rates unchanged but held out a promise to cut them if the upside risks to the inflation do not materialise. Having raised rates twice this year, the central bank had retained its ‘calibrated tightening’ policy stance. Shubhada Rao, Chief Economist, Yes Bank expects that going forward the inflation is expected to be closer to 3.5- 3.7 percent band. “This paves way for the MPC to not just change its stance to neutral but also mull over a possible rate cut. The inflation trajectory looks below 4 percent over the next quarter,” she said.

Wholesale inflation continued to decline for the second consecutive month in December due to cheaper fuel and vegetables. The Wholesale Price Index-based inflation was 4.64 percent in November 2018 and 5.54 percent in October.

In December 2017, WPI inflation stood at 3.58 percent. Deflation in food articles stood at 0.07 percent in December, against 3.31 percent in November. Vegetables continued the deflationary trend for six months and prices declined 17.55 percent in December, compared to 26.98 percent contraction in the previous month. Inflation in the ‘fuel and power’ basket in December slumped to 8.38 percent, nearly half of 16.28 percent in November. This was on account of lowering of prices of petrol and diesel through December. “The continuing deceleration in the growth of WPI and softening of global fuel prices provide ample opportunity to MPC (monetary policy committee) to cut down policy rate at earliest which will kick start investment and revival in overall industrial growth,” Assocham said.