Core inflation, which is seen as an indicator of demand conditions, has plummeted over the last few months, reinforcing concerns about a slowdown in consumption in the economy. While headline inflation has been rising due to an increase in food prices, core inflation, which excludes food and energy prices, has fallen sharply.
Inflation data for the month of June shows that core inflation has fallen at the wholesale and retail levels. Wholesale core inflation fell to a 31-month low of less than 1 percent, showed data released on Monday. Retail inflation data, released on Friday, had shown core inflation fall to a 23-month low of 4.1 percent.
According to analysis from IDFC Economic Research, the moderation in core inflation was led by ‘clothing and footwear' and the miscellaneous category, which includes transportation. The ‘household good and services' category also saw a moderation in inflation. In contrast, ‘personal care', which includes gold jewellery, saw an increase in inflation levels due to higher prices of gold.
Core inflation in both urban and rural areas fell, IDFC said.
Both urban and rural core inflation moderated with urban core at 3.8 percent year-on-year from 4.0 percent last month and rural core inflation cooled to 4.4 percent year-on-year from 4.6 percent last month. Looking ahead, we expect core inflation to continue to moderate with the presence of negative output gap and limited pressures from input prices for manufacturers.IDFC Economic Research
Aditi Nayar, economist at ICRA added that the fall in wholesale core inflation is a reflection of the weak pricing power of producers.
While India's Monetary Policy Committee targets the headline inflation rate, it will likely see the falling core inflation as an indicator of weak demand conditions in the economy. This could prompt it to consider more interest rate cuts, including one in the upcoming August policy review, said Bank of America-Merrill Lynch in a report on Monday.
“Low CPI inflation supports our call of the MPC cutting rates by 25 basis points on August 7 and by 50 basis points by March,” the research house said while adding another 75 basis points in rate cuts can't be ruled out if monsoons are normal and food prices remain in check.
The MPC has cut rates by 75 basis points in 2019, with the repo rate now at 5.75 percent. Headline CPI inflation at 3.2 percent remains below the mid-point of the MPC's target of 4 (+/-2) percent, prompting economists to forecast more interest rate cuts.
“With growth slowing, the call for policy action is mounting, especially on the back of subdued inflation and the absence of any short-term fiscal stimulus in the recently announced budget,” said Pranjul Bhandari, chief India economist at HSBC in a note. Bhandari expects a 25 basis point cut in August and another in the fourth quarter of the current year, taking the repo rate to 5.25 percent by year-end.
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