Instant view: India's Dec retail inflation rate drops to 2.19 percent, lowest since June 2017

BENGALURU (Reuters) - India's retail inflation rate dropped to 2.19 percent in December from a year earlier, the lowest level since June 2017, government data showed on Monday. The decline was helped by a fall in food prices and smaller increases in fuel costs.

Analysts polled by Reuters had forecast December's annual increase in the consumer price index at 2.20 percent, compared with November's 2.33 percent.

COMMENTARY

TUSHAR ARORA, SENIOR ECONOMIST, HDFC BANK, NEW DELHI

"Another month of muted food inflation."

"Going forward, for another six to seven months, retail inflation is unlikely to breach the central bank's target of 4 percent. This certainly opens up room for a rate cut. If not in February, we could see a 25 bps (basis points) cut in the policy rate by April."

"Thereafter, if the MSP (minimum support price) risk does not materialise this year and assuming oil prices remain around $60 a barrel, there could be a possibility of second rate cut as well."

ARUN THUKRAL, MD & CEO, AXIS SECURITIES LTD, MUMBAI

"Inflation is trending southwards for last six odd months on the back of food deflation and cooling fuel prices as crude prices have cooled off. Given these conditions, the overall inflation is expected to trend in the comfort zone of the central bank."

"Currently, RBI (Reserve Bank of India) has 'calibrated tightening' as its stance and given the deflationary forces it is likely to temper it down to neutral stance followed by a rate cut of around 25 bps in the near future i.e. in the next two meets. Probably, at its February 2019 meet, RBI would mellow its stance to neutral and wait for April 2019 meet for reducing the rates."

Sharp rises in crude oil prices would contribute to the inflation along with the impact of rising MSPs (minimum support prices). Volatility in global financial markets continues to impart uncertainty to the inflation outlook, thus being the third key risk. The sharp rise in input costs, combined with rising pricing power, has the potential to cause higher pass-through of retail prices for both goods and services, thus stoking inflation.

Any fiscal slippage at the central or state level will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private sector investment; this factor is of utmost importance, given that the government would likely announce some populous measures like universal basic income or input support scheme for farmers and landless labourers ahead of the general elections in its interim budget."

(Reporting by Krishna V Kurup and Arnab Paul in Bengaluru; Editing by Subhranshu Sahu)