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Consumer inflation shrinks to 5.52%, may lead to rate cut sooner than expected

12 November, 2014

Consumer inflation slid to 5.52 per cent in October, the lowest level since January 2012, since when the government started compiling consolidated national statistics for consumer inflation in India. As per previous consumer price index for urban dwellers, the last time inflation was at this level was in February 2008.

Although this may not immediately lead to a much awaited rate cut by the country’s monetary policy authority RBI, if the moderation in consumer prices is sustained, it could pave the way for easier monetary policy sooner than expected.

India’s monetary policy, which was anchored on wholesale price inflation, has been modified with the RBI now chasing a lower consumer inflation as a key yardstick for deciding on policy rates.

Although consumer inflation statistics have been compiled over decades, it was earlier generated for specific categories of workers (industrial workers, rural labourers and urban non manual workers). The government continues to compile inflation data for industrial workers and rural labourers but has replaced urban white-collar workers inflation with a national consumer inflation, which in turn is based on inflation for urban and rural areas.

In September, retail inflation fell 6.46 per cent, the lowest since the annual consumer inflation statistics begun to be compiled from early 2012.

RBI, under the new governor Raghuram Rajan, has been holding on to policy rates, despite pressure from both the industry and the government to ease policy to revive investments. However, RBI has been looking for a sustained decline in consumer inflation with a target of bringing inflation down to 8 per cent by January 2015 and 6 per cent by January 2016.

October happened to be the first month when consumer inflation has went under the RBI’s long-term target.

In its fourth bi-monthly monetary policy review two months back RBI had decided to hold policy rates, as widely anticipated, at 8 per cent.

The central bank had noted that since June, headline inflation has ebbed to levels which are consistent with the desired near-term glide path of disinflation. “With international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding. Yet, there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly,” it had added.

Crude oil prices has crashed to four-year lows since then which has helped contain inflation in the country. Moreover, vegetables prices declined over October 2013, which contributed to the softening of consumer inflation.

The fifth bi-monthly monetary policy statement is scheduled on Tuesday, December 2, 2014.

(Edited by Joby Puthuparampil Johnson)


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Consumer inflation shrinks to 5.52%, may lead to rate cut sooner than expected

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