Inflation seen cooling in January, output eases

After food prices fell and demand weakened following govt ban on high-value currency notes

Indian inflation likely cooled in January to the lowest in at least five years, after food prices fell and demand weakened following Prime Minister Narendra Modi's ban on high-value currency notes, a Reuters poll predicted.

Consumer price inflation has been below 4% since Modi's November 8 decision to abolish Rs 500 and Rs 1,000 notes wiped out 86% of the currency in circulation, hurting demand in India's largely cash-based economy.

The January inflation rate is due to released at 1200 GMT on February 13.

According to the poll of 26 economists, the inflation rate for January slowed to 3.22% in January, which would be the lowest in the index's five-year history, from 3.41% in December.

"The cash squeeze played a role in the faster decline in prices of perishables and pulses, which is suppressing the headline inflation," said Abhishek Upadhyay, an economist at ICICI Securities.

"Core inflation continues to remain stable closer to 5%," he said.

The median consensus for January consumer inflation is well below the Reserve Bank of India's target of 5% by end-March 2017 and medium-term target of 4%, and would seem to provide ample room for a rate cut.

India's central bank was expected to make 25 basis points cut in the policy repo rate on Wednesday to counter the effects of the currency ban and help revive demand.

But in a surprise move, the RBI's Monetary Policy Committee held the rate at 6.25% and changed its stance to "neutral" from "accommodative", citing risks of high inflation.

Upadhyay said the key takeaway from the meeting is that the RBI is "looking at underlying areas of inflation rather than perishables".

The government's demonetisation drive has had a significant impact on the Indian economy, with both manufacturing and services activities contracting in December, the month after the move was announced.

While factory activity returned to modest growth in January, services, which constitutes around 60% of India's gross domestic product, contracted for a third month, according to the purchasing managers' indexes from Nikkei/IHS Markit.

The Reuters poll also showed that Industrial output growth slowed to 1.1% in December from 5.7% in November.

The reduced pace is "primarily on account of a slowdown in the growth momentum of consumption goods sector. Auto sales were at their 16-year low in December," Rupa Rege Nitsure, group chief economist at L&T Financial Services, wrote in a note.

Wholesale price inflation is expected to have picked up last month to 3.89% from 3.39% in December.