MUMBAI (Reuters) - India’s annual consumer price inflation eased to a weaker-than-expected 3.63 percent in November, its lowest level in two years, helped by a sharp cooling in food prices, government data showed on Tuesday.
Economists surveyed by Reuters had expected annual retail inflation to come in at 3.90 percent last month, compared with 4.20 percent in October.
”I would argue that the decline from last month is primarily reflecting a favourable base effect, and to a smaller extent, subdued demand after the note ban.
”For food inflation in particular, our view is that it’s more of a base effect-led decline.
“I would still expect a gradual uptrend (in inflation trajectory) over the next couple of months and that it would remain under the 5 percent target throughout Q4.”
”Our view is that there is only room for one more rate cut of 25 basis points, given our estimate of the inflation trajectory, and the fact that there has been no change in the real interest rate assumption that the MPC (monetary policy committee) has announced this time.
“Unless there is a major downside surprise on GVA (gross value added) growth, possibly the extent of rate cuts would be limited to 25 basis points til June 2017.”
ABHISHEK UPADHYAY, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP
”Inflation is below our expectation of 3.9 percent. Sharper-than-anticipated drop in perishables food is the key driver of the surprise, indicating the role of cash shortage resulting from de-legalization.
”But this effect is likely to be transient, even as seasonal decline should continue.
”Core inflation was also largely flat in November, and is unlikely to disinflate sharply in coming months.
”The larger picture thus remains that even as a 25 bps easing from RBI is very likely, plausibly in February, there is limited scope for deeper easing.
”Tightening global financial conditions would limit scope for any monetary easing in EMs (emerging markets) in general, and India may be no exception. Any negative growth surprise should be more suitably dealt with fiscal policy, rather than monetary policy, in our view.
”The fall in inflation has been mostly due to demonetisation as perishable prices have crashed. Pulses inflation has also cooled down due to good production.
”Going ahead I expect the demonetisation impact to help cool off inflation til February due to demand contraction. Also since the services PMI has contracted faster than manufacturing PMI it shows that this will also help ease core inflation going ahead, which has been quite sticky.
”Keeping in view all the growth-inflation dynamics going ahead I expect RBI to cut rates in February. Also in all likelihood the government will stick to its fiscal deficit target in the budget in February, which will also help RBI in cutting rates.
“The only risk to this projection is oil prices rising.”
”It is in line with our expectations. We now hope for a rate cut because it is, at the same time, below consensus expectations.
”We are anticipating that even going ahead inflation will remain muted, anywhere around 4 percent.
”We are looking at 75 to 100 (basis points in rate cuts) for the next one year.
“The only marginal risk that I see is from fuel or oil prices. Other than that, I think demonetisation will be disinflationary and it will have a reasonable impact. It won’t be just transient.”
Reporting by Suvashree Dey Choudhury and Abhirup Roy; Compiled by Rafael Nam