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Note ban woes drag retail inflation to five-year low in January

Reuters

India's inflation cooled to its lowest in at least five years in January as food prices fell following the government's cash clampdown, but emerging price pressures mean the Reserve Bank of India (RBI) will probably keep interest rates on hold.

Consumer prices rose by an annual 3.17% last month - their slowest pace since January 2012 when the government launched the current index series.

Economists surveyed by Reuters had expected prices to rise by 3.22% from a year earlier, compared with December's 3.41% increase.

However, core inflation, which excludes volatile food and fuel prices, accelerated to around 5.1% last month from 4.9% in December, government data showed.

"The RBI will continue to hold, the RBI is seeing upside risks to inflation and one data point is not going to change their view dramatically," said Varun Khandelwal, managing director at Bullero Capital.

"Interest rates will remain on hold in the near term."

Historically, India has paid more attention to wholesale prices than consumer ones, but the RBI now tracks retail inflation for setting its interest rates.

Annual retail food inflation eased to 0.53% last month from 1.37% in December, helped by lower prices for vegetables and pulses.

Headline inflation has been under 4% since November, well below the RBI's 5% target for March and medium-term target of 4%.

Low inflation led many to believe the central bank would cut the repo rate last week. But a pick-up in global crude prices, a volatile foreign exchange market, and relatively high domestic non-food and non-fuel inflation have fuelled concerns among RBI officials.

Last week, the RBI shocked investors by holding at 6.25% and shifting its monetary policy stance to "neutral" from "accommodative".

The shift came as Asia's third-largest economy was still limping back to health after Prime Minister Narendra Modi's Nov. 8 decision to outlaw 500- and 1,000- rupee old banknotes wiped out 86% of the currency in circulation overnight.

Industrial production fell 0.4%, year on year, in December, government data showed last week. Those figures came days after a gauge for services sector contracted for a third straight month in January, offsetting a rebound in the Nikkei/Markit manufacturing purchasing managers' index.

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(RBI)

The Reserve Bank of India is the central banking system of India. It controls the monetary policy of the rupee as well as currency reserves in India. The firm regulates the issue of banknotes, maintain reserves with a view to securing monetary stability and and operate the credit and currency system of the country. The company was founded in 1935 and is based in Mumbai, Maharashtra.

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