Retail inflation, as measured by the consumer price index (CPI), slowed to 5.17 percent year-on-year in March, government data released today showed, compared to 5.37 percent in February.
The fall was largely broad-based with food inflation, which constitutes nearly half the index, coming in at 6.14 percent compared to 6.79 percent in February, clothing and footwear slowed to 6.27 percent YoY from 6.38 percent, though fuel and light inflation perked up a bit.
A CNBC-TV18 poll of economists had forecast inflation to come in at 5.36 percent, even though the poll threw up a wide range of numbers.
The latest data reinforces the view that inflation is expected to trend lower in the months ahead -- which may give the Reserve Bank of India room to ease interest rates further, following two rate cuts this year -- but it also provides comfort from the fact that unseasonal rains in March have not had an inflationary impact on food prices.
"It's a very good number [but it is] not entirely unexpected. We were expecting 5.3," JPMorgan chief India economist Sajjid Chinoy told CNBC-TV18.
"It is a good number for two reasons. Petrol and diesel prices were marked up between 5 and 6 percent at the end of February. And you had the upside risk to food because of unseasonal rains. The fact that prices have been stable suggests that upside risks didn't manifest themselves," he said.
At its latest monetary policy review this month, the Reserve Bank of India had said it expected the CPI to come down to about 4 percent before starting to edge up back to its 6 percent target for January 2016.
But part of this trajectory will also be driven by the base effect -- prices were high in the corresponding month last year, which will automatically make the comparable index number look smaller, in percentage change terms this year. At its meet, the central bank said it would await more data, including the monsoon pattern, to make up its mind further on rate policy.
The lower trend in food prices is showing that there are several forces working, according to Chinoy. "Some of the government's food reform measures are working; the effect of lower minimum food support prices is showing; we're getting help from lower global food prices; and finally there is weak demand," he said.
"Our forecast for average inflation this fiscal is 5.4 percent," Standard Chartered's Samiran Chakraborty said. "If that takes place, there is scope for a rate cut of 25-50 basis points in the repo rate and the first one may happen in the June policy itself."
If a rate cut comes to June, bond markets will react positively to the move and the 10-year could move lower from current 7.8 percent levels to 7.55-7.6 percent, Jayesh Mehta, MD and country treasurer, Bank of America-Merrill Lynch.
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