Retail inflation at four-month low, spurs calls for a rate cut

Retail inflation slowed to a four-month low in February, while the wholesale price index posted a negative reading for a 16th straight month, prompting industry groups to call on the Reserve Bank of India (RBI) to cut interest rates to spur economic growth.

Consumer price index-based inflation decelerated to 5.2 per cent from 5.7 per cent in the preceding month. Wholesale prices also continued to soften with official numbers for the wholesale price index (WPI) showing a 0.91 per cent contraction in February.

The data marks the first break in the six-month streak of accelerating retail inflation. Coming soon after official statistics showing industrial output continues to shrink, the figures signal domestic demand is yet to gain significant traction. “The continued decline in prices of manufacturing goods point towards fragile demand conditions and indicates that robust recovery has yet to set in,” Chandrajit Banerjee, Director General, CII said. “At this juncture, when the growth momentum is below expectations and the government has committed to stay the course of fiscal consolidation, CII is hopeful that the RBI would work in sync with the government for building a resilient growth trajectory by initiating monetary easing measures to complement the supportive fiscal initiatives announced in the Budget,” he said.

RBI Governor Raghuram Rajan had on Saturday taken note of the poor industrial performance in January and said while the economy was recovering, this recovery was volatile and that not all economic indicators were moving in the same direction.

Index for Industrial Production (IIP) in January showed output contracted 1.53 per cent compared with the 1.18 per cent contraction in December 2015.

“The annual rate of inflation, based on monthly WPI, stood at -0.91 per cent (provisional) for the month of February, 2016 (over February, 2015) as compared to (-)0.90 per cent (provisional) for the previous month and (-)2.17 per cent during the corresponding month of the previous year,” according to a government statement.“The decline in inflation is attributed to a significant drop in food prices and is in alignment with market expectations,” Mr. Banerjee of the CII said.

Food inflation in the CPI came in at 5.5 per cent in February compared with 6.7 per cent in January. In the WPI, the rate of inflation in food articles also decreased to 3.35 per cent in February from 6 per cent in January. Primary article inflation in the WPI slowed down significantly in February to 1.6 per cent compared to 4.6 per cent in January.

“Prices of manufactured products continue to remain subdued and are a reflection of the weak demand conditions that persist in the economy,” said Harshavardhan Neotia, President, FICCI. “IIP numbers released last week reported negative growth for the third consecutive month in January 2016 and highlight that signs of pick up in the manufacturing sector remain elusive.” While the rate of inflation in manufactured products did remain negative, it moved closer to positive territory in February, coming in at -0.6 per cent compared to -1.2 per cent in January.

Similarly, the rate of inflation in the ‘fuel & power’ segment in the WPI was -6.4 per cent in February compared to -9.2 per cent in January. The ‘fuel & light’ segment in the CPI came in at 4.6 per cent in February, down from 5.3 per cent in January.

Inflation in the housing segment of the CPI accelerated to 5.3 per cent from 5.2 per cent in January.