Easing Inflation Paves Way For Change In Stance By RBI, Say Experts

Retail inflation rate dropped to 2.19 per cent in December from a year earlier, the lowest level since June 2017, government data showed on Monday. The decline was helped by a fall in food prices and smaller increases in fuel costs. Analysts polled by Reuters had forecast December's annual increase in the consumer price index at 2.20 per cent, compared with November's 2.33 per cent.

Here's what experts say: 

Shubhada Rao, chief economist, Yes Bank

"At 2.19 per cent, CPI for December has printed close to our estimate of 2.11 per cent. Led by continued contraction in food prices, the softer CPI inflation was supported by contraction in fuel prices and housing in December. However, miscellaneous component led by education and health has inched up in December."

"Going forward we expect further downside in our average inflation projection of 4 per cent in FY19, closer to 3.5-3.7 per cent band. This paves way for the monetary policy committee to not just change its stance to "neutral" but also mull over a possible rate cut. The inflation trajectory looks below 4 per cent over the next quarter."

Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership

"Inflation is exactly in line with our projections, but internals are weaker. Core inflation declined less than expected, despite a substantial drop in auto fuel prices. Key service segments including household goods, health as well as education have increased sharply on a sequential basis, and belie fears of any sharp slowdown in growth. Food inflation still remains muted, but there was no big surprise after internals for the previous months showed cereals prices fell by a record, despite higher minimum support prices."

"From a monetary policy standpoint, headline inflation is actually tracking slightly lower than RBI's forecast for the current quarter of 2.7 per cent. That makes it likely that RBI would change stance back to "neutral". But elevated core inflation increases risk that headline inflation can surprise higher next year in case food inflation starts to pick up again from current exceptionally low levels. This would preclude any proactive monetary policy easing from the monetary policy committee in our view. Given that output gap has more or less closed despite recent soft patch in growth and there are risks that fiscal stance could turn more stimulative in an election year, a cautious approach to any monetary policy easing is merited. Sharp RBI focus on alleviating any liquidity strains in the banking system is the correct approach to achieve easier monetary conditions at this stage."

Devendra Kumar Pant, chief economist, India Ratings & Research

"The CPI data over the last five months has undershot RBI's target of 4 per cent and this is mainly because of food deflation. Naturally lower oil prices have had its impact. Now if you look at core data which excludes food, energy, transport and communication, it has still remained elevated. In the last 14 months it has remained in excess of 5.7 per cent. However, there was clearly a downward trend in core numbers compared to the first quarter."

"It is unlikely that the government will make out any broad policy announcements in the FY20 budget. However, we will have to keep a close eye on what the two major political parties announce in their election manifestos given 'competitive populism' being the flavour currently."

Tushar Arora, senior economist, HDFC Bank

"Another month of muted food inflation."

"Going forward, for another six to seven months, retail inflation is unlikely to breach the central bank's target of 4 per cent. This certainly opens up room for a rate cut. If not in February, we could see a 25 bps (basis points) cut in the policy rate by April."

"Thereafter, if the MSP (minimum support price) risk does not materialise this year and assuming oil prices remain around $60 a barrel, there could be a possibility of second rate cut as well."

Arun Thukral, MD & CEO, Axis Securities 

"Inflation is trending southwards for last six odd months on the back of food deflation and cooling fuel prices as crude prices have cooled off. Given these conditions, the overall inflation is expected to trend in the comfort zone of the central bank."

"Currently, RBI (Reserve Bank of India) has 'calibrated tightening' as its stance and given the deflationary forces it is likely to temper it down to neutral stance followed by a rate cut of around 25 bps in the near future i.e. in the next two meets. Probably, at its February 2019 meet, RBI would mellow its stance to neutral and wait for April 2019 meet for reducing the rates."

Sharp rises in crude oil prices would contribute to the inflation along with the impact of rising MSPs (minimum support prices). Volatility in global financial markets continues to impart uncertainty to the inflation outlook, thus being the third key risk. The sharp rise in input costs, combined with rising pricing power, has the potential to cause higher pass-through of retail prices for both goods and services, thus stoking inflation.

Any fiscal slippage at the central or state level will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private sector investment; this factor is of utmost importance, given that the government would likely announce some populous measures like universal basic income or input support scheme for farmers and landless labourers ahead of the general elections in its interim budget."