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Cooling Retail Inflation Bolsters Rate Cut Hopes

Retail inflation eased for a third straight month in October, helped by smaller rises in food prices, boosting the chances of an interest rate cut by the central bank next month

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Retail inflation eased for a third straight month in October, helped by smaller rises in food prices, boosting the chances of an interest rate cut by the central bank next month.

Consumer prices rose by an annual 4.20 per cent last month, their slowest pace in 14 months, government data showed on Tuesday (15 November).

The figure matched the median consensus in a Reuters' poll of economists. Retail prices were up 4.39 per cent in September on the year.

Food inflation was 3.32 per cent, lower than 3.96 per cent recorded in September.

The data comes days after Prime Minister Narendra Modi ordered the withdrawal of large denomination banknotes from circulation, in a shock "demonetization" drive to fight tax evasion, corruption and forgery.

The sudden move to cancel old Rs 500 and Rs 1,000 banknotes, which accounted for 86 per cent of the cash circulating in Asia's third-largest economy, has caused huge disruption to daily life, depressing consumer demand.

People struggling to get new bills are holding back on spending, except for immediate and urgent needs. The price of fresh produce has collapsed in food markets, leaving farmers and traders sitting on rotting stocks.

Once the initial shock wears off, the formal economy is likely to expand at the expense of fly-by-night traders who deal in cash. That in turn may improve the efficiency of markets and make it easier for the Reserve Bank of India's (RBI) to hit its medium-term inflation target of 4 per cent.

"The 'black money' drive will increase the pace of deceleration, specifically in the service sector, which has a lot of cash transactions," said Soumya Kanti Ghosh, chief economist at State Bank of India.

"I expect a rate cut in December and that won't be the end."

The RBI's recently formed monetary policy committee is due to review rates on December 6 and 7.

(Reuters)


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