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RBI not likely to cut interest rate this year – CRISIL Research

Retail inflation is likely to remain slightly below last year’s levels going forward as a higher base and government action prevent a repeat of last year’s spike in prices, CRISIL Research said. It also predicted that the Reserve Bank of India will not cut its interest rate this year.

“This year, given the steps taken by the government, we do not expect a similar surge in prices but any build of price pressures needs to be monitored closely. The government has already offered a line of credit to states to import pulses to compensate for domestic supply shortage and keep prices in check. In the case of cereals fortunately, the affected crops, namely jowar, bajra have a low weight (2.4% together) in the CPI food basket,” it said in a note.

According to numbers released today, retail inflation fell to 7.8% in August from 8.0% in July as a sharp decline in core inflation offset a marginal uptick in inflation of food articles. CPI inflation fell to 7.8% in August from 8% last month as a sharp decline in core inflation (inflation excluding food and fuel) more than offset a marginal pick-up in food inflation. For the first time since January 2012, core CPI inflation fell below the 7.0% mark to 6.8% y-o-y in August. The seasonally adjusted month-on-month momentum in the core also fell to 0.3% in August from 0.6% last month.

“Over the next 4 months, headline CPI inflation could ease further as a strong base effect from last fiscal kicks-in, lower crude oil prices create downward pressure on transport & communication inflation, and proactive measures taken by the government help check any spike in food prices. Moreover, the monthly hike of 50 paise in diesel prices has also come to an end. Beyond January however, once the favourable base effect wears off there is a possibility of headline CPI inflation rising slightly above 8% toward the end of the fiscal year. This means that there is no room for a rate cut in FY15.”

A year ago, food inflation surged to an average 13% during September-December 2013 due to a supply-side shock to vegetable prices.

This year, a low increase (3-4%) in minimum support prices of rice and wheat and the offloading of excess stocks will also help keep a check on food inflation, CRISIL Research said.

Foodgrain stocks in the central pool are currently at 17.3 million (mn) tonnes for rice and 35.5 mn tonnes for wheat – both of which are 2.5 times the quantity mandated by buffer norms and strategic reserve requirements.

According to today’s numbers, the fall in core inflation was driven by an over 1 percentage point decline in inflation in 2 categories; transport & communication and household requisites. “Both of these categories, (together having a weight of 30% in the core CPI index) favourably benefited from a very strong base effect from August last year. Excluding these two, core CPI inflation was almost unchanged from last month at 7.7%.

“A significant decline in petrol prices (Rs 5.4 per litre since July in Mumbai) due to lower crude oil prices globally, is also likely to have contributed to the downward price pressures in transport & communication. We expect this to continue going forward as no further hike in diesel prices is expected as long as crude oil prices stay at current levels,” it added.

In the case of food articles, price pressures were seen building up in pulses, condiments & spices and milk & milk products, the agency said.

“Inflation in each of these categories has been rising for the last 3 months. Inflation in pulses in fact rose by 1.1 percentage points to 6.9% y-o-y in August, and needs to be watched closely as the crop has been impacted by weak monsoons this year.”

According to the CRISIL Deficient Rainfall Impact Parameter (DRIP) – which captures both the agnitude of the rainfall shock (measured as the deficiency of rainfall) as well as the vulnerability of a region (measured as a percentage of unirrigated area) – pulses and coarse cereals are likely to have suffered some damage due to the late onset of monsoons coupled with heavy rains in certain parts of the country this year. The DRIP scores for pulses and coarse cereals this year are similar to (or slightly worse) 2012 when inflation in these categories had surged to over 13-14% in the second half of the year, it added.

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