India’s retail inflation rate just hit its lowest point since June 2017, raising the prospects of a rate cut and more handouts to farmers

(Image source- Reuters)

  • Data released by India’s Central Statistics Office (CSO) showed that retail inflation, as measured by the Consumer Price Index (CPI), hit a 17-month low of 2.33% in November 2018.
  • This was largely due to a continued decline in the prices of food items like vegetables and pulses. In fact, food inflation came in at negative rate of 2.61%.
  • The trend raises the possibility that the Reserve Bank of India will reduce interest rates when its Monetary Policy Committee meets next in early February 2019.
  • The Modi administration will also look to provide more handouts to farmers in order to raise food prices and rural incomes ahead of general elections next year.
On 12 December, India’s Central Statistics Office (CSO) released its inflation data for November. As expected, retail inflation, as measured by the Consumer Price Index (CPI), fell short of the Reserve Bank of India’s 4% target for the fourth consecutive month.

More importantly, retail inflation hit a 17-month low of 2.33%, more than a percentage point down from the previous month, largely owing to a continued decline in the prices of food items like vegetables and pulses. In fact, food inflation came in at negative rate of 2.61% amid the excess production of agricultural commodities.

The data was released a week after the central bank’s decided to keep rates on hold at 6.5% and maintained a stance of “calibrated tightening” despite taking stock of the reduction in food prices by cutting the inflation forecast.

While lower food prices are obviously a welcome development for consumers, they can hurt rural incomes. The trend raises the possibility that the RBI will reduce interest rates when its Monetary Policy Committee meets next in early February 2019, should current conditions persist. The monetary policy stance is also expected to shift from “calibrated tightening” to “neutral”.

Rate cuts usually spur ‘aggregate demand,’ which provides a boost to the prices of items and economic growth as wages and profits rise. This, coupled with a positive upswing in industrial output, which rose by 8.1% year-on-year in October, portend for a strong GDP result in the third and fourth quarters of 2018-19. At his first press conference yesterday, the new RBI governor Shaktikanta Das recognised the “benign” level of inflation and the effect on economic growth.

The inflation data also has significant implications for the central government’s policies with respect to farmers. After ceding significant ground to the opposition party in the elections for three key state assemblies, the Modi administration will look to regain favour with farmers ahead of general elections next year.

As things currently stand, the government’s minimum support price scheme for kharif crops has not translated into higher prices for farmers. Hence, it will go back to drawing board and try and formulate quick-fixes to its price support policies and provide more handouts to farmers when it releases its interim budget in February next year.


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