India&#39;s inflation cooled to its lowest in at least five years in January as food prices fell following the government&#39;s cash clampdown, but emerging price pressures mean the Reserve Bank of India (RBI) will probably keep interest rates on hold.

Consumer prices rose by an annual 3.17 per cent last month - their slowest pace since January 2012, when the government launched the current index series.

Economists surveyed by Reuters had expected prices to rise by 3.22 per cent from a year earlier, compared with December&#39;s 3.41 percent increase.

Annual retail food inflation eased to 0.53 per cent last month from 1.37 percent in December, helped by lower prices for vegetables and pulses, government data showed on Monday.

In a worry for the central bank, another inflation gauge that excludes volatile food and fuel prices accelerated to around 5.1 per cent in January, after hovering around 4.9 per cent since September.

The RBI&#39;s monetary policy committee reckons sticky core inflation could trigger wide side-effects.

&quot;The RBI is seeing upside risks to inflation and one data point is not going to change their view dramatically,&quot; said Varun Khandelwal, managing director at Bullero Capital.

&quot;Interest rates will remain on hold in the near term.&quot;

Headline inflation has been under 4 per cent since November, well below the RBI&#39;s 5 per cent target for March and medium-term target of 4 per cent.

End of loosening cycle

Still, the RBI last week shocked investors by holding the repo rate at 6.25 per cent and shifting its monetary policy stance to &quot;neutral&quot; from &quot;accommodative&quot;.

The shift comes as Asia&#39;s third-largest economy is still limping back to health after Prime Minister Narendra Modi&#39;s Nov. 8 decision to outlaw old 500- and 1,000- rupee banknotes wiped out 86 per cent of the currency in circulation overnight.

Industrial production fell 0.4 per cent, year on year, in December, government data showed last week.

Even as the economic fallout of demonetisation remains unclear, the RBI is worried about a pick-up in global crude prices along with exchange rate volatility, which it says could push headline inflation above its medium-term target.

Global crude oil prices are up nearly 14 per cent since end-November. The Indian rupee is expected to weaken by nearly 4 percent from its current levels to 69.50 a dollar in 12 months.

Most economists now expect the RBI to hold rates until at least the second half of next year.

&quot;We continue to believe that the RBI will have to tighten

policy sooner than most are anticipating,&quot; Capital Economics said in a flash note.

(Reuters)

But emerging price pressures mean India's central bank will probably keep interest rates on hold

India's inflation cooled to its lowest in at least five years in January as food prices fell following the government's cash clampdown, but emerging price pressures mean the Reserve Bank of India (RBI) will probably keep interest rates on hold. Consumer prices rose by an annual 3.17 per cent last month - their slowest pace since January 2012, when the government launched the current index series. Economists surveyed by Reuters had expected prices to rise by 3.22 per cent from a year earlier, compared with December's 3.41 percent increase. Annual retail food inflation eased to 0.53 per cent last month from 1.37 percent in December, helped by lower prices for vegetables and pulses, government data showed on Monday. In a worry for the central bank, another inflation gauge that excludes volatile food and fuel prices accelerated to around 5.1 per cent in January, after hovering around 4.9 per cent since September. The RBI's monetary policy committee reckons sticky core inflation could trigger wide side-effects. "The RBI is seeing upside risks to inflation and one data point is not going to change their view dramatically," said Varun Khandelwal, managing director at Bullero Capital. "Interest rates will remain on hold in the near term." Headline inflation has been under 4 per cent since November, well below the RBI's 5 per cent target for March and medium-term target of 4 per cent. End of loosening cycle Still, the RBI last week shocked investors by holding the repo rate at 6.25 per cent and shifting its monetary policy stance to "neutral" from "accommodative". The shift comes as Asia's third-largest economy is still limping back to health after Prime Minister Narendra Modi's Nov. 8 decision to outlaw old 500- and 1,000- rupee banknotes wiped out 86 per cent of the currency in circulation overnight. Industrial production fell 0.4 per cent, year on year, in December, government data showed last week. Even as the economic fallout of demonetisation remains unclear, the RBI is worried about a pick-up in global crude prices along with exchange rate volatility, which it says could push headline inflation above its medium-term target. Global crude oil prices are up nearly 14 per cent since end-November. The Indian rupee is expected to weaken by nearly 4 percent from its current levels to 69.50 a dollar in 12 months. Most economists now expect the RBI to hold rates until at least the second half of next year. "We continue to believe that the RBI will have to tighten policy sooner than most are anticipating," Capital Economics said in a flash note. (Reuters)

India's retail inflation lowest in about five years

Inflation in India is expected to have cooled to a two-year low in December as the government&#39;s surprise currency crackdown rattled the economy and severely hurt consumption, a Reuters poll found.

Retail inflation likely eased to 3.57 per cent from a year earlier, from 3.63 per cent in November, the poll of over 30 economists showed.

That would be the lowest since November 2014, and well below the Reserve Bank of India&#39;s near-term target of 5 per cent by March 2017.

Prime Minister Narendra Modi&#39;s decision on November 8 to outlaw high-value banknotes, aimed at curbing corruption and tax evasion, has forced the nation&#39;s 1.2 billion people to scramble to exchange old notes for new and left many companies&#39; cash-reliant supply chains in tatters.

The government insists the impact from the move will be short-lived, but many private economists are trimming their GDP forecasts, reckoning it will linger for one more year.

&quot;We expect headline CPI inflation to fall, primarily due to a significant sequential fall in the prices of several food items and many other perishables on account of the cash crunch created by demonetisation,&quot; said Rupa Rege Nitsure, group chief economist at L&amp;T Financial Services in Mumbai.

India&#39;s central bank unexpectedly left its repo rate unchanged at 6.25 per cent last month, saying the blow from the cash squeeze may be transitory and expressing concern over the rising risk of inflation from higher global oil prices.

If inflation remains below the near-term target, it will give the central bank room to make a rate cut at its next meeting on February 8.

Industrial output likely accelerated 1.3 per cent in November from a year ago, after falling 1.9 per cent in October, the poll also forecast.

&quot;The impact of the demonetisation drive will be better reflected in weak December readings,&quot; wrote Radhika Rao, an&nbsp;economist at DBS Bank, in a note.

&quot;Subdued capital goods output is likely to be accompanied by a slow patch in consumer durables and non-durables production as inventories build on slower demand.&quot;

Wholesale price inflation is expected to have picked up last month to 3.50 per cent from 3.15 per cent in November, according to the poll.

(Reuters)

Retail inflation likely eased to 3.57 per cent from a year earlier, from 3.63 per cent in November, the poll of over 30 economists showed

Inflation in India is expected to have cooled to a two-year low in December as the government's surprise currency crackdown rattled the economy and severely hurt consumption, a Reuters poll found. Retail inflation likely eased to 3.57 per cent from a year earlier, from 3.63 per cent in November, the poll of over 30 economists showed. That would be the lowest since November 2014, and well below the Reserve Bank of India's near-term target of 5 per cent by March 2017. Prime Minister Narendra Modi's decision on November 8 to outlaw high-value banknotes, aimed at curbing corruption and tax evasion, has forced the nation's 1.2 billion people to scramble to exchange old notes for new and left many companies' cash-reliant supply chains in tatters. The government insists the impact from the move will be short-lived, but many private economists are trimming their GDP forecasts, reckoning it will linger for one more year. "We expect headline CPI inflation to fall, primarily due to a significant sequential fall in the prices of several food items and many other perishables on account of the cash crunch created by demonetisation," said Rupa Rege Nitsure, group chief economist at L&T Financial Services in Mumbai. India's central bank unexpectedly left its repo rate unchanged at 6.25 per cent last month, saying the blow from the cash squeeze may be transitory and expressing concern over the rising risk of inflation from higher global oil prices. If inflation remains below the near-term target, it will give the central bank room to make a rate cut at its next meeting on February 8. Industrial output likely accelerated 1.3 per cent in November from a year ago, after falling 1.9 per cent in October, the poll also forecast. "The impact of the demonetisation drive will be better reflected in weak December readings," wrote Radhika Rao, an economist at DBS Bank, in a note. "Subdued capital goods output is likely to be accompanied by a slow patch in consumer durables and non-durables production as inventories build on slower demand." Wholesale price inflation is expected to have picked up last month to 3.50 per cent from 3.15 per cent in November, according to the poll. (Reuters)

India: Inflation seen cooling to two-year low in December as cash crunch hit demand

The 6-member monetary policy committee (MPC) of the RBI met for the second time since its inception to decide on the key monetary policy indicators of India. The decision taken by the MPC comes as a shock to many as one of the key rates i.e. the repo rate has been kept unchanged at 6.25%. 
&nbsp; 
Repo rate is the rate at which banks borrow from the RBI. 
&nbsp; 
Most of the experts, economists and bankers had predicted that the repo rate would be cut by 25 to 50 basis points at the back of slowdown of consumer price index (CPI) and a potential slowdown of the economy due to demonetisation.

CPI is a number that refelects the average price of a basket of consumer goods such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation.

Economics behind cut in the repo rate 
&nbsp; 
If the repo rate is cut, then the banks would be able to borrow at a lesser rate and then, they can pass this to the end-consumers by reducing the lending rates. Reduced lending rates would encourage people to take loans for businesses, education, buying a house and other personal needs, thus increasing the GDP of the country and subsequently the economic growth as well. 
&nbsp; 
However, there is another side to the story. If people are borrowing more, this implies that there are higher investments in the economy. High investments imply&nbsp;increased employment and thus,&nbsp;rise in the demand for goods and services, increasing the price level in the economy.

Whenever the MPC meets, they always have to face this dichotomy of chosing between higher economic growth versus high price levels. 
&nbsp; 
Current decision of MPC 
&nbsp; 
According to the statement of India&rsquo;s central bank, Reserve Bank of India&#39;s governor Urjit Patel, the reason behind keeping the repo-rate unchanged is to meet the&nbsp;inflation targets of 5% (with a plus-minus of 2%) for the last quarter&nbsp;of the&nbsp;financial year 2016-17. 
&nbsp; 
It seems that the inflation targeting took precedence over any other consideration while deciding the repo rate. Three main reasons that seem plausible for such hawkish approach are:

<ul>
	<li>Implementation of seventh pay commission recommendations can lead to rise in inflation &nbsp;</li>
	<li>Rise in domestic food prices</li>
	<li>Rise in crude oil prices after OPEC&rsquo;s decision to cut production</li>
</ul>

&nbsp; 
In the past couple of weeks, post demonetisation several experts and prominent organisations have cut down the GDP forecast for Indian economy. Even the RBI today cut the growth forecast for this fiscal from 7.6% to 7.1%. &nbsp;Thus, experts believed that RBI would cut the repo-rate to stimulate the economy and achieve the growth targets. 
&nbsp; 
However, it is believed that with the deposit of Rs 11.55 crore in banks post-demonetisation, there is excess liquidity in banks which would anyways encourage the banks to reduce their lending rates whether the repo rate cut happens or not. 
&nbsp; 
Some private banks like ICICI, Axis bank and Bank of Baroda have already reduced their lending rates in the past week before the meeting of MPC. 
&nbsp; 
No sweat over liquidity crunch 
&nbsp; 
Post-demonetisation, the Indian economy is reeling under liquidity crunch with thousands of people queuing outside ATMs and banks each day to withdraw money.&nbsp; 
&nbsp; 
During the press conference, RBI officials showed fair amount of confidence and said that the situation is under control as far as the liquidity is concerned. According to RBI officials, the remonetisation exercise is in full throttle with all the five printing presses of both RBI and government working to full capacity to print new notes. From November 10th to December 5th, RBI has printed currency worth Rs 4 lakh crore of higher denominations like the Rs 500 and Rs 2000 and during the same period, around 19.1 billion pieces of Rs 100, Rs 50 and Rs 20 denomination notes were printed. 
&nbsp; 
The RBI officials also mentioned that they may reduce the number of notes being printed as people are increasingly moving towards digital modes of payment. &nbsp; 
&nbsp; 
Clear distinction between monetary and fiscal policy 
&nbsp; 
Going by the textbook, the main monetary policy indicators are price level and money supply and the monetary policy lies in the domain of the central bank of a country, in this case, RBI. 
&nbsp; 
The fiscal policy is the domain of the government of a country and both the monetary and fiscal policy have to work in tandem for the future growth and economic stability of a country.&nbsp; 
&nbsp; 
Today, it can be observed that the RBI stuck to its side of the policy mandate, focusing completely on inflation targeting and trusting the government to work on the GDP front.

In the coming months, one should be on the lookout for the figures of the major economic indicators to get a sense of how the demonetisation policy has worked for India.

(WION)

 
&nbsp;

Most experts, economists and bankers had predicted the repo rate would be cut by 25 to 50 basis points

The 6-member monetary policy committee (MPC) of the RBI met for the second time since its inception to decide on the key monetary policy indicators of India. The decision taken by the MPC comes as a shock to many as one of the key rates i.e. the repo rate has been kept unchanged at 6.25%. Repo rate is the rate at which banks borrow from the RBI. Most of the experts, economists and bankers had predicted that the repo rate would be cut by 25 to 50 basis points at the back of slowdown of consumer price index (CPI) and a potential slowdown of the economy due to demonetisation. CPI is a number that refelects the average price of a basket of consumer goods such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation. Economics behind cut in the repo rate If the repo rate is cut, then the banks would be able to borrow at a lesser rate and then, they can pass this to the end-consumers by reducing the lending rates. Reduced lending rates would encourage people to take loans for businesses, education, buying a house and other personal needs, thus increasing the GDP of the country and subsequently the economic growth as well. However, there is another side to the story. If people are borrowing more, this implies that there are higher investments in the economy. High investments imply increased employment and thus, rise in the demand for goods and services, increasing the price level in the economy. Whenever the MPC meets, they always have to face this dichotomy of chosing between higher economic growth versus high price levels. Current decision of MPC According to the statement of India’s central bank, Reserve Bank of India's governor Urjit Patel, the reason behind keeping the repo-rate unchanged is to meet the inflation targets of 5% (with a plus-minus of 2%) for the last quarter of the financial year 2016-17. It seems that the inflation targeting took precedence over any other consideration while deciding the repo rate. Three main reasons that seem plausible for such hawkish approach are: Implementation of seventh pay commission recommendations can lead to rise in inflation Rise in domestic food prices Rise in crude oil prices after OPEC’s decision to cut production In the past couple of weeks, post demonetisation several experts and prominent organisations have cut down the GDP forecast for Indian economy. Even the RBI today cut the growth forecast for this fiscal from 7.6% to 7.1%. Thus, experts believed that RBI would cut the repo-rate to stimulate the economy and achieve the growth targets. However, it is believed that with the deposit of Rs 11.55 crore in banks post-demonetisation, there is excess liquidity in banks which would anyways encourage the banks to reduce their lending rates whether the repo rate cut happens or not. Some private banks like ICICI, Axis bank and Bank of Baroda have already reduced their lending rates in the past week before the meeting of MPC. No sweat over liquidity crunch Post-demonetisation, the Indian economy is reeling under liquidity crunch with thousands of people queuing outside ATMs and banks each day to withdraw money. During the press conference, RBI officials showed fair amount of confidence and said that the situation is under control as far as the liquidity is concerned. According to RBI officials, the remonetisation exercise is in full throttle with all the five printing presses of both RBI and government working to full capacity to print new notes. From November 10th to December 5th, RBI has printed currency worth Rs 4 lakh crore of higher denominations like the Rs 500 and Rs 2000 and during the same period, around 19.1 billion pieces of Rs 100, Rs 50 and Rs 20 denomination notes were printed. The RBI officials also mentioned that they may reduce the number of notes being printed as people are increasingly moving towards digital modes of payment. Clear distinction between monetary and fiscal policy Going by the textbook, the main monetary policy indicators are price level and money supply and the monetary policy lies in the domain of the central bank of a country, in this case, RBI. The fiscal policy is the domain of the government of a country and both the monetary and fiscal policy have to work in tandem for the future growth and economic stability of a country. Today, it can be observed that the RBI stuck to its side of the policy mandate, focusing completely on inflation targeting and trusting the government to work on the GDP front. In the coming months, one should be on the lookout for the figures of the major economic indicators to get a sense of how the demonetisation policy has worked for India. (WION)

Why the RBI kept interest rates unchanged despite demonetisation

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India's retail inflation lowest in about five years

India: Inflation seen cooling to two-year low in December as cash crunch hit demand

Why the RBI kept interest rates unchanged despite demonetisation