India Inflation Eases More Than Estimated Before Rate Review

(Bloomberg) -- India’s consumer price inflation eased to a 13-month low as food prices remained subdued, allowing room for the central bank to hold interest rates when it reviews monetary policy next month.

Consumer prices rose 3.31 percent in October from a year earlier, the Statistics Ministry said in a statement Monday. That compares with a 3.77 percent gain in September and an estimate of 3.60 percent in a Bloomberg survey of 33 economists.

The weaker than expected inflation adds pressure on the monetary policy committee to stand pat for a second straight meeting after they raised rates to the highest level in two years in August. That increase has added to tighter financial conditions amid liquidity moving from surplus to deficit in the past few months, with the Bloomberg Economics India Banking Liquidity Index showing a nearly 1 trillion rupee shortfall in the banking system.

“Given the ongoing credit crunch which is hitting demand in small and medium sectors, the stabilization in crude prices and the rupee, I expect both inflation as well as industrial growth to become softer in the coming months,” said Rupa Rege Nitsure, chief economist at L&T Finance in Mumbai. “We are not expecting any rate hikes.”

Key Insights

  • Food and beverage prices fell 0.14 percent; clothing and footwear prices gained 3.55 percent, fuel and lighting prices rose 8.55 percent, housing prices jumped 6.55 percent.
  • On Oct. 5, Reserve Bank of India Governor Urjit Patel said a cut was off the table and interest rates would either be on hold or move up.
  • Core inflation -- which strips out volatile food and fuel prices -- was at 6.1 percent in October, according to Aditi Nayar, principal economist at ICRA Ltd.
  • India’s factory output rose 4.5 percent in September, slower than the revised 4.67 percent in August, data showed Monday.
  • Figures due Wednesday will show India’s wholesale price inflation rate was probably 4.93 percent in October. Wholesale prices gained 5.13 percent in September

What Our Economists Say...

"This is likely to surprise the RBI, which changed its monetary policy stance from neutral to calibrated tightening in October, citing upside risks to inflation. We expect the inflation undershoot to counter the RBI’s hawkish bias to monetary policy and for the central bank to maintain a pause at its December review."

-- Abhishek Gupta, Bloomberg Economics

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