Would A Sharp Fall In Inflation Lead To A Rate Cut?

RBI will closely watch core inflation as demand revives in the economy

Would A Sharp Fall In Inflation Lead To A Rate Cut?
Vishav - 13 January 2021

As the consumer price index (CPI) inflation fell sharply in December to a 14-month low of 4.59 per cent from 6.93 per cent in November, experts said due to the timing of the “positive” news, there could be a case for the Monetary Policy Committee to cut rates in its next meeting.

“Finally, something to cheer about, the retail inflation has fallen way below the central bank's comfort level. After almost a year of near 6 per cent or higher inflation, we are now witnessing a fall in inflation primarily on account of a favorable base and steep fall in food and vegetable prices. The fall has come at the right time ahead of MPC meet next month, it will certainly raise hopes from MPC on rates,” said Nish Bhatt, Founder, and CEO, Millwood Kane International, an investment consulting firm.

Rahul Gupta, Head of Research (Currency), Emkay Global Financial Services, said the December CPI has come as a surprise, lower than the market expectations.

“It’s after April 2020, inflation has come in between RBI’s medium target range of 2-6 per cent. However, with an increase in crude oil prices and fears over bird flu, inflation may remain sticky for some time. This may give RBI some room to cut interest rates but in our view, the central bank may continue its pause at the Feb’s policy and look out for more incoming data,” he added.

Rajani Sinha, Chief Economist, Knight Frank India, said the moderation in CPI inflation has been mainly because of a sharp fall in food inflation, which has been possible due to falling vegetable prices, even while protein inflation has remained high.

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