India's retail inflation eased in March to a six-month low, helped by smaller rises in food prices, giving relief to policymakers as they strive for faster economic growth without unleashing price pressures.
Raghuram Rajan, Governor of the Reserve Bank of India (RBI), cut policy rates by 25 basis points last week to a more than five-year low, saying he could look for more room to ease if inflation trends stay benign.
Annual consumer price inflation, which the RBI tracks to set its interest rate policy, eased to 4.83 per cent in March from a year ago, data released by the Ministry of Statistics on Tuesday (12 April) showed.
If inflation holds below 5 per cent, that could encourage the central bank to ease interest rates further, some analysts said, while others saw little room left.
"The drop in Indian consumer price inflation in March is likely to fuel talk of more interest rate cuts, but we think that the scope for further monetary loosening is limited," said Shilan Shah, India economist at Capital Economics.
Economists surveyed by Reuters had forecast retail inflation would slow to 5 per cent in March from an upwardly revised 5.26 per cent in February.
Output at factories, utilities and mines grew an annual 2 per cent in February, higher than the 1.0 per cent forecast by economists surveyed by Reuters.
Retail inflation has eased from double digits in 2013, helped by a plunge in global crude oil prices, tight monetary policy and fiscal consolidation.
Finance Minister Arun Jaitley aims to bring down the federal deficit to 3.5 per cent of gross domestic product in the current fiscal year, while allocating more funds to the struggling farm sector.
Food inflation eased slightly to 5.21 per cent in March from 5.30 per cent the previous month.
Offering hope that India's two-year drought may soon end, India's weather office forecast that this year's June-September monsoon rains would be above average.
"The above-normal monsoon forecast should augur well for agricultural production, and thus there are downside risks to inflation estimates as far as food inflation is concerned," said Madhavi Arora, an economist at Kotak Mahindra Bank in Mumbai.
India's annual economic growth slowed to 7.3 per cent in the October-December quarter from 7.7 per cent the previous quarter, below the 8.0 per cent growth needed to generate jobs for the millions of Indians joining the workforce each year.
The central bank aims to bring retail inflation down to 4 per cent by March 2018.
It fears a proposed hike of about 24 per cent in the wages of nearly 10 million central government employees and pensioners later this year could put upward pressure of 1-1.5 per cent on inflation.
In Asia, China's annual retail inflation remained stable at 2.3 percent in March, followed by South Korea's 1.0 per cent, compared with 4.45 per cent in Indonesia.
CommentaryAnjali Verma, Economist, Phillipcapital India Ltd, Mumbai"CPI is better than expected with across-the-segment improvement. However, the biggest surprise was from month-on-month fall in fuel inflation versus our expectation of a rise.
"Overall, we are retaining our expectation of another 25 basis point rate cut by the RBI going ahead on the back of easing inflation.
"The risk going ahead could come from commodities, but with the forecast of normal monsoon, inflation worries are expected to be contained."
Shilan Shah, India Economist, Capital Economics, Singapore"Inflation is now below the RBI's 5 per cent target for March 2017. Alongside last week's cut in the repo rate, this may fuel talk of further monetary loosening. However, we still think that the RBI has a tough task in meeting its inflation targets.
"One factor that is likely to add to inflation over the coming months is that fuel inflation is set to rise as the deflationary impact of lower global oil prices continues to reverse.
"In addition, as the RBI alluded to in last week's policy statement, there is a risk that food and energy inflation will spike over the coming months if, as has been the case in the past two years, the monsoon rains are weak again this time round.
"Finally, there are reasons to think that the finance ministry will be forced to relax its budget deficit targets over the coming months. A looser fiscal stance could boost inflation expectations, which have already been rising of late.
"In terms of what this all means for policy, we still expect the repo rate to remain on hold at 6.50 per cent for the rest of 2016 and 2017."
Shubhada Rao, Chief Economist, Yes Bank, Mumbai"Momentum is looking lower. The core inflation is lower with 24 bps month-on-month decline. Although we expect some of the food price momentum to pick up in coming 2-3 months, outlook for monsoon being favourable should be adequate to offset interim price pressure on food.
"Overall inflation trajectory appears to be well within RBI's indicative target for March, and as such, we expect a 25 bps rate cut as early as June.
"If food inflation surprises on a significant downside on RBI's target by 50 bps by March, further rate cuts cannot be ruled out."
A Prasanna, Economist, ICICI Securities Primary Dealership, Mumbai"The downside surprise from food inflation has sustained. If monsoon turns out good, then some disinflation in pulses will continue. However, services inflation remains sticky, which will prevent inflation from sustaining below 5 per cent.
"In terms of monetary policy we do not expect any action from the RBI as inflation has to consistently print below 5 percent for the central bank to be convinced that its inflation target will be achieved. Inflation excluding petrol still remains sticky at 5.1 per cent.
"IIP (industrial output) number is definitely positive but capital goods output continues to be disappointing which raises a question mark on the sustainability of the recovery unless investment demand picks up."
(Reuters)
