Retail inflation slows to 16-month low of 4.06% in January

The inflation based on the Consumer Price Index (CPI) was 4.59 per cent in December 2020

India’s retail inflation cooled further in January while the Index of Industrial Production (IIP) rebounded, giving ample space to the Reserve Bank of India to cut key interest rates and give further push to economic growth.

According to government data, consumer price inflation touched a 16-month low and stood at 4.06% in January compared to 4.59% in the previous month on the back of a continued fall in vegetable prices which dropped by nearly 16%. Food and beverages inflation fell to 2.67% from 3.87% in December.

But core inflation, which strips out the volatile food and fuel, remained elevated at 5.33%. The RBI, however, tracks the headline numbers for its rate re-adjustment.

"While low inflation would likely bring expectations of a rate cut back to the table (we continue to expect a cut in 2021), the RBI would likely keep a hawk eye on core inflation and want to be confident of its easing before delivering a cut," said Kunal Kundu, economist at Societe Generale in Bengaluru.

Aditi Nayar, chief economist of ICRA, however, had a diverging view. “With inflation expected to resume an uptrend in February-March 2021, we do not think that the softer-than-anticipated print creates room for an imminent rate cut," said Nayar.

"Unless a cut in indirect taxes on fuels results in a sharp softening of the inflation trajectory, we expect the rate-cut cycle to have ended."

A high base of January last year partly contributed to lower inflation in January this year, but going forward the base effect will wane in February and March. Retail inflation had risen to nearly 8% in January 2020.

In another good news, the IIP rose 1% in December compared to a contraction of 2.1% in November, data showed. Among three key industries in the index, mining remained in contraction mode but manufacturing and electricity saw output growth.

Industrial output entered the positive territory after a gap of one month. The manufacturing sector, which constitutes over 77% of the index, recorded a growth of 1.6%, mining sector output declined by 4.8%, while electricity output grew by 5.1%.