 "Vegetable vendors wait for customers in their stalls at a market in Mumbai")
The Consumer Price Index (CPI)-based inflation fell to 3.63 per cent in November — a record low in the new series — from 4.2 per cent in October. The main reason for contraction in demand was demonetisation, said analysts.
In November last year, the number was quite high — 5.41 per cent, a record then. The higher the number in the previous year, the lower the inflation looks in the current year. Technically, it is called the base effect. On November 8 this year, Prime Minister Narendra Modi announced the old series of ~500 and ~1,000 notes to be illegal tender. The withdrawal of high-value notes sucked out 86 per cent value of the currency in the economy.
According to the CPI-based inflation number released on Tuesday, inflation in food items — which account for over 45 per cent in CPI — was down to 2.11 per cent, from 3.32 per cent in October. The inflation in discretionary items, such as paan, tobacco and intoxicants, was down to 6.29 per cent in November, from 7.09 per cent in October.
Vegetables continued to witness deflation. Pulses, a headache to the policymakers till July, saw inflation falling to 0.23 per cent in November, from 4.11 per cent in the previous month. Analysts are of the opinion that inflation was likely to improve in the next quarter (January to March).
Icra Principal Economist Aditi Nayar said she expected inflation to trend upwards in the fourth quarter but remain within the Reserve Bank of India’s projection of five per cent.
The room for further rate cuts seemed to be limited to 25 basis points (bps), unless lead indicators for economic activity for Q4 fail to reveal a recovery in growth, she said.
Nayar has based her assessment on the monetary policy committee’s (MPC) indication that real interest rates may need to be below 150 bp in the global scenario of negative rates, compared with the earlier range of 150-200 bps.
Fuel inflation fell slightly to 2.8 per cent in November, from 2.81 per cent the previous month. However, going forward, fuel inflation may rise because of the decision by the Organization of the Petroleum Exporting Countries and some other major producers to cut output.
Not only did inflation fall year-on-year, there was also deflation month-on-month, at 0.15 per cent in November. Food deflation was 0.66 per cent month-on-month. This was not the case in pre-demonetisation.
