Retail inflation, measured by the movement of the Consumer Price Index (CPI), dipped to 2.18%, a 5-year low, in May 2017 from 2.99% the month before. A higher base effect year and negative food inflation (of -0.22%) were the main factors that worked in its favour.

Pulses and products recorded a steep fall of -19.45% in May (v/s -15.94% in April), while vegetable prices were down -13.44% in (v/s -8.59% in April). Cereal and products, milk and products, sugar and confectionary and prepared meals & snacks reported over 4% inflation as against the much higher numbers of the previous month. Similarly, fruits, eggs, spices and meat, and fish recorded a price rise of sub 2% lower than the price reported for the previous month.

As a result, the Consumer Food Price Index (CFPI) recorded -1.05% inflation as against +0.61% in April 2017.

Slide in retail inflation — led by softening food prices…

Data as on May 2017
(Source: MOSPI, PersonalFN Research)

‘Food and beverages’ as a category constitutes nearly 45.86% of the CPI.

Core inflation (i.e. non-food-non-fuel), too, stayed below the 5% mark, which was again an abetting factor for headline inflation.

However, these are not the only factors responsible for mellowing inflation. The problem of plenty has also worked to the advantage. According to the estimates from the Ministry of Agriculture, vegetable production was up by 3.5% in 2016-17 (2nd estimate) after growing 1.5% in the previous year. This one of the reasons why vegetable prices have been easing down since mid-2016, to be precise since July 2016. And this drop, as seen from the chart above, accelerated further after demonetisation, before it rose a little between February and April 2017, and descended in May once again.

Further, traders have also been offloading certain agriculture produce ahead of GST.  

With all these factors in play, CPI inflation is well placed neared the lower band of the Reserve Bank of India’s (RBI’s) projection of 2.0-3.5% in the first-half of the year. And now there’s a clamour for a policy rate cut yet again.  

But…

The Reserve Bank of India would be like to watch out for the progress of monsoon; although the IMD is hopeful of a ‘normal’ monsoon this year, and has revised its estimates to 100% of LPA (Long Period Average) from 96% in forecasted in April. It expects a fair distribution of rainfall across the country, ruling out an El-Nino conditions building during the latter half of the monsoon season.  Hence, the central bank in its 2nd bi-monthly monetary policy statement for 2017-18 has stated, “risks (for inflation trajectory) are evenly balanced, although the spatial and temporal distribution of the monsoon and the Government staying the course in effective food management will play a critical role in the evolution of risks”

Further, the central bank also seems cognisant of the farmers protest in Maharashtra and in many parts of the country for a farm loan waiver (after a precedent by Uttar Pradesh) which would weigh on food prices. Wastage of food during the protest, as well as the sporadic strikes, can potentially stoke food inflation in times to come. “The risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers” the press release states.

The GST rates recently announced by the Government aren’t a reason for anxiety. The central bank has stated that implementation of the GST is not expected to have a material impact on overall inflation.

“At the current juncture, global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th Central Pay Commission’s (CPC’s) award are upside risks to the inflation trajectory”, RBI has stated. Hence for the second-half of the year, RBI has projected inflation to be in the range of 3.5-4.5%.

The RBI in its 2nd bi-monthly monetary policy cited the April reading and has imparted considerable uncertainty to the evolving inflation trajectory, especially for the consecutive months. Plus, it is of the view that the effects of demonetisation on the price formation of food articles have lasted longer than expected.

It expects the on-going remonetisation drive and higher Government spending to push the overall demand in the economy higher, thereby triggering inflation. Furthermore, the RBI also believes that trends in input costs, wages, and fuel prices in the international markets along with currency fluctuations need to be monitored continuously to be able to identify the pressure points.

Hence, the future course of the RBI’s monetary policy action will be hinged on the incoming macroeconomic data.

So far the impact on your borrowing cost and investments…

Banks have ensured transmission of policy rate as credit growth has been rather tepid post-demonetisation.

Now is the time to avail a home loan; because RBI in its Statement on Developmental and Regulatory Policies (released on June 7, 2017) has taken a step to make home loans cheaper reducing the risk weight for certain category of loans. The central bank has also reduced the standard assets provisions on individual housing loans to 0.25% from 0.4% earlier. (To know the details read: Now’s The Time to Avail a Home Loan. Here’s Why…)  

In reaction to the move, State Bank of India is the first to have reduced interest rates on home loans above Rs 75 lakh. The Bank cut rates by 10 basis points to 8.6% and this will take effect from June 15, 2017. Salaried woman borrowers will enjoy an interest rate of 8.55%. This is the second home loan rate cut in two months by the public sector bank.

Speaking of your investment in bank fixed deposits; thereto interest rates have gone down since…

• There’s excess liquidity in the system;
• There isn’t much prudence in holding on to high cost deposits (as borrowing rates have come down);
• Savings bank account anyway is offering a higher rate, and there’s a need to balance this

During such times, if you’re seeking to receive better returns at low risk, debt funds could be the answer. But selecting the correct category of debt mutual funds is crucial.

If you wish to know more about the best debt mutual funds to invest in, subscribe to PersonalFN’s DebtSelect. Get your subscription to DebtSelect right away. 

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