India’s retail inflation, which has kept well under the Reserve Bank of India’s comfort level for quite some time now, is unlikely to touch the central bank’s 4% upper limit in the near future, an economist said. India’s CPI inflation for July is expected to be at around 3.2%, Indranil Pan, Chief Economist, IDFC Bank, told Financial Express Online. The inflation data for July will be released today evening. At 3.2%, the CPI inflation will continue its six-month rising streak, but still be well below the RBI’s flag line.
Factors such as delayed monsoon pushed India’s retail inflation to an 8-month high of 3.18 per cent in June 2019. The surge in food prices has comparatively increased the overall inflation in the past few months, however lack of demand has kept the core inflation down. Retail inflation rose by 4.17 per cent in July 2018.
Is low inflation a good sign?
Low inflation has both merits and demerits. Low inflation brings down food prices, which leaves more food on the table. Since the production is higher, consumption also goes up. Also, the consumption of non-essential products goes up, which helps the economy to grow. On the other side, fall in food prices leaves low income in the hands of farmers. The minimum support price (MSP) is reduced and even for larger production, the farmers’ cut is slashed, said Indranil Pan.
Trade-off: inflation or growth?
Growth in the economy cannot be expected without a substantial level of the inflation rate, he added. There is a trade-off that the government has to choose to keep inflation low. As inflation increases, people tend to pay more for the same amount of goods and services, leaving more in the hands of the companies or the manufacturers.
Can RBI cut the rates further?
“Even when the inflation rate has maintained below the benchmark, the Current Account Savings Account (CASA) in most of the banks have come down. At the same time, term deposit rates did not decrease,” said Abhimanyu Sofat, VP-Research, IIFL. Repo rate and 10-year bond yield are low related to historic levels hence it will be difficult for the central bank to cut rates further, he added.