Retail inflation fell steeply in November, mostly in response to a fall in prices of perishable items, which were sold at a discount to prevailing prices in the aftermath of the government’s decision to withdraw Rs 500 and Rs 1000 notes from circulation.
The consumer price index rose 3.63 percent in November compared to 4.2 percent in October. The steep fall in the inflation rate was anticipated and a Bloomberg poll had pegged inflation at 3.9 percent.
At current levels, inflation is at its lowest in two years and far below the RBI’s target of 5 percent for March 2017. The monetary policy committee, however, in its resolution on December 7 kept interest rates steady and highlighted the transitory nature of the drop in inflation following the government’s decision to demonetise.
Despite some supply disruptions, the abrupt compression of demand in November due to the withdrawal of SBNs (specified bank notes) could push down the prices of perishables in the reading that becomes available in December. On the other hand, prices of wheat, gram and sugar have been firming up. While discretionary spending on goods and services in the CPI excluding food and fuel – constituting 16 per cent of the CPI basket – could have been affected by restricted access to cash, the prices of these items may weather these transitory effects as they are normally revised according to pre-set cycles.Monetary Policy Committee Resolution (December 7)
The Fall In Perishables
Break-up of the inflation data shows that a lot of the fall came from the food and beverages category where the inflation rate slipped to 2.56 percent in November compared to 3.71 percent in October.
The decision to withdraw Rs 500 and Rs 1000 notes, announced on November 8, had led to a sudden currency crunch which, in turn, stalled cash-driven transactions. While producers of manufactured goods may have had the option to hold on to their inventory, those selling perishable items did not.
As such, the inflation rate in most perishable categories fell in November compared to the previous month.
- Inflation for meat and fish fell to 5.83 percent from 6.16 percent
- Inflation for eggs fell from 9.42 percent to 8.55 percent
- Inflation for vegetables fell to -10.29 percent from -5.74 percent
In addition, inflation in the pulses category fell to 0.23 percent in November from 4.11 percent in October.
Significant decline in vegetable prices contributed to easing of food inflation, thereby leading to fall in overall CPI. Lower demand owing to demonetization has resulted in complete collapse in vegetable prices. We have estimated that due to demonetization there would be 40 bps decline in inflation in November and 20 bps in December.Soumya Kanti Ghosh, Chief Economic Adviser, State Bank of India
Core Inflation Holds
While headline inflation fell, items that form part of the core inflation bucket, did not see any major change in trend.
Inflation in the housing segment was at 5.04 percent in November compared to 5.15 percent in October. Transport and communication inflation rose to 3.77 percent compared to 3.41 percent last month. Inflation in the personal care and effects segment, which includes household purchases of gold, was at 7.73 percent in November compared to 7.20 percent in October.
Inflation in the fuel and light segment was at 2.80 percent, unchanged from the previous month.
Core inflation was more or less stable during the month. Notably, core (ex-fuel) reported a dip to 5.2 percent from 5.3 percent in the previous month. Our trajectory indicates an end-March 2017 level of around 4.6 percent. We see a possible case building up for a further 25 basis points cut in repo rate by the RBI in the months ahead.Indranil Pan, Chief Economist, IDFC Bank