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Will India’s Low Inflationary Trend Sustain in 2H17?

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Inflation in India

Consumer prices in India (INDY) rose 1.5% year-over-year in June 2017, slowing sharply from their 2.2% rise in May 2017. Favorable monsoon seasons in the last two consecutive years have helped keep food prices low in 2017. Lower pulse prices in 2017 due to excess supply and record output and imports have helped keep inflation low.

The CPI (consumer price index) is the Reserve Bank of India’s main way of measuring inflation.

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Inflation in June 2017

India’s (INDA) inflation in June 2017 stayed below market expectations of 1.7%. The inflation rate fell to a record low for the third consecutive month as food prices fell faster due to the favorable monsoon season. 

Record food grain production in 2016 is also expected to keep inflation at a moderate level in 2017, according to many analysts.

Inflation to rebound in 2H17

The significant fall in inflation since April 2017, compared to rising inflation in the first couple of months of the year, has raised uncertainty about the inflationary trend in India (EPI) in 2017, according to the Reserve Bank of India. 

Headline inflation, which includes volatile items, is projected to be in the range of 3.5%–4.5% in 2H17. The Reserve Bank of India expects the inflation trajectory to pick up in 2H17 for the following reasons:

  • monsoon disruption
  • effective food management by government
  • large farm loan waivers
  • global political and other risks resulting in imported inflation
  • disbursement of allowances under the Seventh Central Pay Commission’s award
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Monetary policy

Recently, the Reserve Bank of India kept its benchmark repo rate steady at 6.3% on June 7, 2017, in line with its neutral monetary policy stance. Accordingly, the reverse repo rate has remained stable at 6%, and the marginal standing facility rate and the bank rate have been stable at 6.5%.

However, the Reserve Bank of India is expected to initiate an interest rate cut after September 2017 after considering the inflationary impact of the goods and services tax (or GST).

A change in the repo rate is expected to affect interest rate–sensitive sectors such as the financials (IBN) (HDB), automobiles (TTM), and technology (WIT) (INFY) sectors. The government’s remonetization efforts are also expected to prop up discretionary consumer spending, specifically in cash-intensive segments.

Let’s look at the trade balance in India in our next article.

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