Inflation down in February; raises hope for interest rate cut

Retail inflation eased in February as food prices rose at a slower pace, while Wholesale Price Index stayed in negative territory for the 16th month, raising expectations of interest rate cut by the Reserve Bank next month.

PTI| Updated: Mar 14, 2016, 21:43 PM IST
Inflation down in February; raises hope for interest rate cut

New Delhi: Retail inflation eased in February as food prices rose at a slower pace, while Wholesale Price Index stayed in negative territory for the 16th month, raising expectations of interest rate cut by the Reserve Bank next month.

Retail inflation, as measured by the Consumer Price Index (CPI), rose by 5.18 percent in February, lower than 5.69 percent in January.

After rising for five months in a row, retail inflation in February fell to 3-month low of 5.18 percent as food prices including vegetables, pulses and fruits became rose at a much slower pace.

 

WPI-based inflation also declined for the month. It was (-)0.91 percent, led by tumbling oil prices, according to data released by Ministry of Commerce and Industry. It was (-)0.9 percent in January.

The declining inflation and negative industrial outlook have strengthened a case for RBI cutting interest rate in its first bi-monthly monetary policy for 2016-17 on April 5.

Consumer food prices rose by a lower 5.3 percent in February, as opposed to 6.85 percent increase in January. Fruit prices dipped 0.7 percent, while prices of pulses rose about 38 percent.

 

RBI Governor Raghuram Rajan had on Saturday stated that government sticking to fiscal consolidation roadmap of reducing deficit to 3.5 percent of the GDP in 2016-17 was comforting. On how that would feed into monetary policy, he had said "wait and see".

The central bank aims to bring down CPI inflation, which it tracks closely to set its interest rate policy, to 5 percent by March 2017 and 4 percent a year later.

"A further cut in the policy rate at this juncture and its transmission by the banks in the form of lower lending rates would benefit both, companies and consumers alike, and impart some momentum to the still weak investment and consumption cycle," industry chamber Ficci said.

Assocham too pressed for a rate cut arguing that the government has fulfilled its commitment of sticking to the fiscal consolidation path by deciding to keep the deficit for 2016-17 at 3.5 percent of GDP.

"Therefore, it gives the room to RBI to ease liquidity and reduce interest rates to dispense with deficient demand in the economy," the chamber said.

According to Richa Gupta, Senior Director, Deloitte India, said retail inflation, in line with the trend in WPI, also came in below consensus estimates, primarily on the back of lower food inflation.

Overall food inflation declined by 1.2 percent to touch 5.5 percent in February while fuel and power inflation eased on decline in international prices since the beginning of the year.

However, "structural rigidities will keep overall inflation from falling down any time soon and pose challenge to RBI in its bid to achieve the 5 percent target next year".

Overall, the latest print on inflation is likely to provide comfort to RBI and "we could possibly see one more rate cut in the upcoming policy meeting", she said.

Also, any further easing would be contingent on the effect of the implementation of the Pay Commission, quantum and spread of rains and the evolving situation in the global economy.