Following the ease of retail and wholesale inflation,the industry is demanding a 0.50% cut in repo rate.
Softening food prices helped ease retail as well as wholesale inflation in October, raising hopes that RBI may go in for another rate cut in its monetary policy review next month.
Retail or CPI inflation dipped to 14 month low of 4.20 % in October, while the one based on wholesale prices or WPI fell for the second consecutive month to 3.39 % in October. While Consumer Price Index based retail inflation was at 4.39 % in September, the one tracking Wholesale Price Index was at 3.57 %. Retail food price inflation in October was 3.32 %, lower than 3.88 % recorded in September.
The WPI food inflation basket too showed moderation with inflation at 4.34 % in October, as against 5.75 % in September. The easing inflation prompted industry chamber Ficci to demand reduction in interest rate to support investor as well as consumer sentiment. "An immediate 0.50 % cut in repo rate should be considered by RBI as well as some measures may be introduced to provide easy finance for sectors like housing, automobiles and consumer durables," Ficci President Harshavardhan Neotia said.
The all-powerful Monetary Policy Committee headed by RBI Governor Urjit Patel last month cut benchmark interest rates by 0.25 % to 6.25 %. The next RBI policy review is on December 7. While Patel had signalled more tolerance towards inflation, the easing in CPI data was in line with the RBI's inflation target of 5 % for March 2017.
ICRA Senior Economist Aditi Nayar said the demonetization of Rs 500 and Rs 1,000 notes could further lower inflation in the coming months. "The temporary shock to economic activity, including predominantly cash based transactions at mandis as well as construction activity, would have an impact on wholesale prices from mid-November 2016 onward," Nayar said.
Industry demand for rate cut comes after data showed that factory output in the April-September period declined by 0.1 % compared to 4 % growth in the year-ago period. Industry chamber CII said that going forward, inflation both at wholesale and retail level, is likely to remain muted as favourable monsoon would augment food supplies in the marketplace and international commodity prices would continue to remain under pressure.
"The RBI should continue with its rate easing cycle to support demand in anticipation of a benign inflationary outlook for the future," CII Director General Chandrajit Banerjee said. As per the data released on Tuesday, WPI inflation in vegetables witnessed deflationary pressures and was recorded at (-)9.97 % in October. Inflation in this category had scaled a high of 28.45 % in July. This was aided by inflation data for onion, which was at (-)65.97 %. Pulses inflation continued to rule high at 21.80 % in October, while that in fruits rose 6.45 %. As per the retail or CPI data, inflation in vegetables was (-)5.74 %, while in pulses and fruits it was 4.11 % and 4.42 %. Nayar further said that since CPI is dominated by food items, whose demand is unlikely to fall appreciably because of demonetization. "We do not expect demonetization to have a significant downward impact on CPI inflation in the immediate term".
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