NEW DELHI: Consumer inflation fell sharply for the second month in a row in September, touching a 13-month low and validating the Reserve Bank of India’s decision to frontload an interest rate cut in anticipation of such a development. 
 

Data released by the statistics office showed consumer inflation at 4.31% in September compared with 5.05% in August and 6.07% in July. The decline was due to a steep drop in food inflation to 3.88% in September from 5.91% in August. The data raises hopes of more rate cuts as the outlook for inflation is benign for about six months and there’s a good chance consumer inflation will stay below RBI’s 5% target for March 2017. 

“We expect a 25 basis point (bps) cut in December,” said Madan Sabnavis, chief economist at CARE Ratings. “RBI will not let the rate go below 6%. On the inflation front, we expect CPI (consumer price index) to be around 5% most of the time.” 

A basis point is one-hundredth of a percentage point. Thursday’s data comes days after industrial production fell more than expected for the second month running in August, pulled down by a sharp decline in capital goods and muted mining activity because of the monsoon. 

The Monetary Policy Committee chaired by RBI governor Urjit Patel cut the key interest rate on October 4 by a quarter point to 6.25% and maintained an accommodative monetary stance, taking most experts by surprise. 

The next bi-monthly policy review will take place on December 7. October’s inflation data will also be available by then. “The government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action,” RBI had said justifying its rate cut. IDFC Bank chief economist Indranil Pan expects RBI to reduce interest rates by 25 bps in the rest of the year but cautioned that pulses may get costlier as demand outpaces supply. 

Following a good monsoon, the food price index was pulled down by vegetables and pulses. Vegetable price inflation was at -7.21% in September compared with 14% in July. The trend was along expected lines and is likely to be sustained next month as well. Rising crude and commodity prices shouldn’t be a cause of worry for retail inflation, economists said. “The first advance estimate of kharif crop production forecast a broad-based uptick in harvest of all crops, barring sugarcane, which should ease price pressures in the coming weeks,” said ICRA senior economist Aditi Nayar. “This, in conjunction with the favourable base effect, should dampen food inflation further in the next two prints.”