Historic low: Retail inflation eases to 6.5% in September

But RBI likely to still wait for comfort on Jan 2016 target before cutting interest rate

The rate of retail inflation in September eased to 6.46 per cent — the lowest since the series was launched in January 2012 — driven mainly by a significant drop in food prices and subdued demand for industrial goods. The rate, as measured by the consumer price index (CPI), had stood at 7.73 per cent in August and 9.84 per cent in September last year.

However, despite the inflation rate falling to a level much below the Reserve Bank of India’s target of eight per cent for January 2015, a lowering of the key policy rate is unlikely in the near future. According to economists, the central bank might wait for more surety on its target for the next year — having the retail inflation rate at six per cent in January 2016.

“We expect the RBI’s January 2015 target to be comfortably achieved. But the likelihood of a repo rate cut in 2014-15 remains low,” said Icra Senior Economist Aditi Nayar.

However, Deloitte India Senior Director Anis Chakravarty said the RBI would find some comfort in these numbers and might aid in the nominal anchoring that had been set. “We do not expect the rates to be revised till the trend of sub-seven per cent retail inflation holds,” he added.

With the wholesale inflation rate having already declined to a five-year low of 3.74 per cent in August, industry has been calling for a cut in the repurchase rate by the RBI. The demand has grown louder, with the annual industrial growth rate in August falling to 0.4 per cent, the lowest this financial year.

The lowest rate for CPI-based inflation before this was seen in June (7.46 per cent). At the time of the launch of the series in January 2012, the rate was 7.65 per cent. In September, retail inflation declined in both urban and rural areas - at a much steeper rate in the latter. While it came down by 0.70 percentage points from the previous month in urban areas (from 7.04 per cent in August to 6.34 per cent), the rural areas saw it plunging 1.59 percentage points (from 8.27 per cent to 6.68 per cent).

The drop in retail inflation was largely driven by the food component of it. The retail food inflation rate declined 1.68 percentage points in the month - to 7.67 per cent from 9.35 per cent in August -partly because of the Pitra Paksha period, when Hindu devotees observe dietary restraints. Food has a weight of 45 per cent (the highest) on CPI.

Still, among food sub-components, inflation in pulses rose from 6.88 per cent in August to 7.18 per cent in September. The data came at a time when advance estimates for food production indicated production of pulses in this year's kharif season would be 14 per cent lower than a year ago.

Cereal prices in the month rose 6.42 per cent on a year-on-year basis, against 7.39 per cent in August.

Oils and fats did not see any annual price change in September, while it was 0.70 per cent the previous month. However, kharif production of oilseeds is projected to decline 12 per cent from last year; this might increase inflation in their prices in the near term. Eggs, fish and meat turned 6.35 per cent more expensive in September (on a year-on-year basis), against 7.71 per cent in August. Inflation in vegetable prices fell to 8.59 per cent from 15.15 per cent in August, while fruit prices rose at 22.40 per cent (against 24.27 per cent the previous month). Fuel & light turned 3.45 per cent costlier on a yearly basis, compared with 4.15 per cent in August.

A softening in prices of various commodities, including crude oil and domestic prices of unregulated fuels, are expected to benefit the CPI trajectory in the coming months. Besides, according to economists, a favourable base effect would moderate retail inflation till November this year.