India's inflation has dropped so low it may trigger another rate cut
- Consumer price index (CPI) inflation decreased to 3.15% in July 2019, dropping a few basis points from last month. In the same month last year, it was at 4.17%.
- The country’s wholesale price index dropped to 1.08%. For the same month last year, it was 5.27%.
- Since February, the RBI cut its interest rates by 1.35% in effect (including changing stance to accommodative).
Looks like, they will have more to do and that too, soon.
Today, the country’s wholesale price index dropped to 1.08%. For the same month last year, it was 5.27%. This was due to cheaper fuel and food costs. The country’s consumer price index (CPI) inflation decreased this month to stand at 3.15% in July 2019. In the same month last year, it was at 4.17%.
“In such a situation, we believe that RBI may not pause the rate cut cycle as of now, but the magnitude of rate cuts would depend on the GDP numbers,” said a report by SBI Ecowrap.
Low retail inflation means that the prices of essential commodities are stable. And wholesalers too are experiencing low demand, and are cutting rates to make sure that their stock moves fast.
All in all, economic growth is so low that demand from both households and businesses are low. So, the central bank can increase the money supply in the system through more rate cuts to spur economic activity and consumption.
The biggest worry for RBI is to balance growth with inflation. Releasing more money into the system will directly push up food and other commodity prices, stressing the poorest of the country.
Easing, easing and more easing
Since February, the RBI cut its interest rates by 1.05% and also changed its stance to accommodative which accounts to yet another 0.25% of easing. It also promised to ensure banks pass them on.
However, given the low level of inflation right now, after 4 straight rate cuts, RBI has less to worry about. “The good part is that we are seeing the transmission in India is happening quicker and by a larger magnitude than before. We also expect that more banks will take the initiative in coming days,” the report said.
Lowering interest rates in the country can help the slowing growth in the country. The July auto sales slipped to a 20 year low, as it dropped by 31% landing a massive blow to the sector. Subsequently, over 350,000 jobs were reportedly lost, bringing the entire sector to a grinding halt. Dealerships have been shuttering down, while automakers are halting production.
“We expect industrial growth to revive in the coming months backed by easy monetary policy, increase in lending and the government’s assurance to revive the economy with sector specific stimulus packages,” said a report by Brickwork Ratings.
Reflecting this slowdown, industrial production registered a dismal 2% in June, as compared to 7% last year. “It has brought down the 3-month moving average growth to 3.6% as against the previous level of 3.9%,” the report said.
In spite of all these downtrends, RBI is confident that India will clock in a GDP growth of 6.9% this year, just slightly lower than its previous estimate of 7%. It also believed that the growth will be led by the second half of the year. And to make sure that their predictions come true, RBI will have to open their purse strings further so that the country has more to spend and grow.
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