CPI Inflation Remains Below 4% As Food Prices Remain In Check

Irving Hamilton
October 13, 2018

Retail inflation rose slightly to 3.77% in September, government data showed on Friday.

Inflation within the targeted range and signs that demand may be cooling in the world's fastest-growing major economy prompted the central bank to keep interest rates on hold last week, and lower the forecast for gains in consumer prices.

The consumer price index (CPI) inflation rate for September 2018 stood at 3.77 percent against August's 3.69 percent, on higher food and fuel costs, and pushed up by a battered rupee.

Another set of data released showed that the August industrial output (IIP) grew at 4.3 per cent in August, down from 4.8 per cent posted in the same period previous year.

Mining slump drags factory output growth to 3-month low of 4.3% in Aug Fund (IMF) on Tuesday called for further tightening of monetary policy in India to anchor expectations as inflation was expected to pick up.

According to the central bank, a 20 percent increase in the price of the Indian basket of crude to $96 a barrel would dent growth by 30 basis points and stoke inflation by 40 basis points. The increase in inflation was driven by higher food and fuel prices and a depreciating rupee. The reverse repo rate was also retained at 6.25 percent.

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Manufacturing output, which constitutes more than 77 per cent of the IIP, moderated to 4.6 per cent in August from 7 per cent in July but was higher than 3.8 per cent in the same period past year, the data showed.

Inflation in the transport and communication segment came in at 6.42 percent, higher than the 5.97 percent in August 2018. The IIP growth is the lowest since May when industrial production grew at 3.9 per cent. Factory growth expanded by 6.8 per cent in June and 6.5 per cent in July.

"Given the massive depreciation of the rupee and elevated crude oil prices, RBI will have to resort to policy rate signals sooner than later". "The mild uptick in the CPI inflation in September 2018 is in line with our expectation of a sub-4 per cent print for that month".

Higher petrol and diesel prices will have an impact on the core and overall inflation.

The Monetary Policy Committee's change to a more hawkish stance comes amid concerns that surging oil and volatile financial markets could add to price pressures and offset the comfort from falling food prices.

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