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Inflation Drop May Increase Pressure For RBI Rate Cut

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India's inflation dropped to a new multi-year low in October, helped by slower annual rises in food and fuel prices, intensifying pressure on the central bank to cut interest rates to encourage spending and investment needed to boost growth.
 
Continuing decline in food prices pulled wholesale price inflation to a five-year low of 1.77 per cent in October, government data showed on Friday.
 
The Wholesale Price Index (WPI) based inflation was at 2.38 per cent in September and 7.24 per cent in October 2013.
 
The food inflation fell to a nearly two-and-half year low of 2.7 per cent.
 
The sharp drop in WPI inflation, which fell for the fifth month in a row, came at the back of retail inflation declining to a record low of 5.52 per cent in October.
 
The rate of price rise in onion contracted 59.77 per cent as compared to a contraction of 58.12 per cent in September.
 
In case of vegetables, the contraction was 19.61 per cent, while in protein rich items of egg, meat and fish it was 2.58 per cent in October.
 
During the month, inflation in potato stood at 82.11 per cent, against 90.23 per cent in the previous month.
 
Inflation in manufactured products, like sugar, edible oils, beverages and cement, fell to 2.43 per cent in October as against 2.84 per cent in the previous month.
 
The Reserve Bank of India (RBI) has a 6 per cent inflation target for January 2016.
 
"With inflation at or under 6 per cent we think RBI is likely to face pressure to ease, not just from the government, but also from RBI's own policy committee," said Devika Mehndiratta, a senior economist at Australia and New Zealand Banking Group Ltd in Singapore.
 
She expects retail inflation to hit a low of close to 4 per cent in November, opening up an opportunity for a 25 basis points interest rate cut in the second quarter of 2015.
 
Interest Rate Cut
Indian businesses have been pleading for a cut in interest rates, which are among the highest in Asia, to stimulate consumption in a domestic demand-driven economy.
 
Consumer goods output - a proxy for consumer demand that drives 60 per cent of India's economy - has grown in just two of the last 21 months. It fell an annual 4.0 per cent in September.
 
The RBI is meeting on December 2 to review policy, having kept its key repo rate steady at 8.0 per cent since January.
 
A poll last month had shown that economists expected rates to be held unchanged until well into next year, due to worries that price pressures would revive once a favourable base effect fades out and food prices rise after a poor summer rains.
 
Bond traders are betting on one of the biggest interest rate reductions among major emerging markets once the rate cutting cycle begins.
 
The 10-year benchmark bond yield had dropped 36 basis points since October 1 until the last session on hopes of a rate cut.
 
(Agencies)