Retail inflation hits three-year low of 3.41% in December

Cash crunch due to demonetisation has suppressed the demand

Retail inflation decelerated slightly to a series low last month, led by a decline in food prices. 

The likely cause is the cash crunch due to demonetisation of high-denomination currency that suppressed demand. This lower rate of consumer inflation enhances the possibility of an interest rate reduction by the monetary policy committee (MPC) in its next meeting. 

Consumer Price Index-based inflation, primary gauge of the central bank, fell to 3.4 per cent in December versus 3.6 per cent in the previous month, data released by the Central Statistics Office showed on Thursday. This was a fifth month in a row of decline in the rate of rise. The consumer food price index fell to a 15-month low of 1.34 per cent, from 2.03 per cent the previous month.

“This is due to both higher production entering the markets and possible distress sale at mandis due to the cash position,” said Madan Sabnavis, chief economist, CARE Ratings. Farmers reported a drop in sales after Rs 500 and Rs 1,000 currency notes ceased to be legal tender from midnight of November 8. 

The non-food price indices for clothing, housing and others saw inflation of four to five per cent. “These segments of core inflation have to be monitored closely,” said Sabnavis. 

The MPC, led by Reserve Bank of India (RBI) chief Urjit Patel, aims to contain inflation at four per cent, with a band of two per cent above and below. Its latest cut in the repo rate, at which RBI lends to banks, was in October by 25 basis points, to 6.25 per cent. 

“The fall in prices of vegetables and fruits is likely to have come on the back of insufficient cash to transact, while the decline in pulses is possibly on account of supply augmentation,” said Richa Gupta, senior economist at consultancy Deloitte.

Inflation in pulses eased to a negative 1.57 per cent versus 0.23 per cent inflation the previous month. Fuel inflation moved up to 3.77 per cent, from 2.8 per cent in November.

Gupta said global commodity prices, the pace of domestic recovery and implementation of the goods and services tax will introduce some uncertainty in the outlook. “However, given the price impulse in the system, the probability of another rate cut has possibly gone up,” she added.

The already muted demand in the economy was dented further on account of demonetisation. Public sector banks have responded by cutting lending rates for housing loans.

Clothing and footwear inflation inched downwards to 4.88 per cent, from 4.98 per cent in November. The index underwent a base year revision from 2010 to 2012 in February last year.