Source: The Economic Times, Dec 14, 2016
NEW DELHI: Retail inflation fell to a two-year low in November due to the ongoing cash crunch following the demonetisation of Rs 500 and Rs 1,000 notes from November 8.
Data released by the statistics office on Tuesday showed consumer inflation at 3.63% in November led by a fall in food prices, also due to a normal monsoon this year after two consecutive years of drought.
Retail inflation, measured by the Consumer Price Index, was 4.2% in October. The overall decline in inflation was due to a moderation in food inflation which fell to 2.11% from 3.32% in October.
Consumer inflation was 5.41% in November 2015.
While nearly Rs 15.4 lakh crore in old currency notes has become useless, the Reserve Bank of India has so far introduced only about Rs 4.61lakh of new currency. In the absence of cash, consumers have cut consumption to preserve cash they have, impacting demand.
“The impact of delegalisation of currency will remain visible in retail inflation numbers of some more months,” said Sunil Kumar Sinha, principal economist at India Ratings & Research.
“The correction in inflation for paan, tobacco and intoxicants in November 2016 offers the clearest evidence of a decline in demand for discretionary items after the note ban,” said Aditi Nayar, principal economist at ratings agency ICRA.
Prices of paan, tobacco and intoxicants rose 6.29% from a 7.09% rise in October. Inflation in the category of ‘prepared meals, snacks, sweets’ was 5.82% in November vis-àvis 6.17% in October. This is a proxy for eating out. Similarly, the growth in prices of non-alcoholic beverages slowed to 3.7% in November from 4.13% in October.
Food and beverages inflation rose 2.56% in November compared with a 3.71% rise in October. Clothing and footwear inflation was 4.98% and fuel inflation at 2.8% — down from October’s inflation of 5.24% and 2.81%, respectively.
RATE CUT OUTLOOK
RBI did not cut rates in its December 7 review citing multiple reasons including an imminent rate increase by the US Federal Reserve. The same factors may hold its hands when the Monetary Policy Committee meets in February.
“It is too early to rejoice at this inflation figure. Looking at The complexity of global factors such as the Fed raising rates, expectation of a stimulus in the US, firming up of commodity prices and oil producing countries’ decision to lift oil prices by cutting production, I don’t think the RBI would cut interest rate in February,” Barua said.
Barring these uncertainties, the performance of the economy points to the need for a rate cut with many reports of job losses. Industrial production contracted in October, resuming its decline after marginal growth in September, suggesting more pain going ahead as the impact of note withdrawal begins to show up.