Demonetization Impact – Retail Inflation at Two Year Low

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Demonetization has impacted the spending habit of Indian population. The retail inflation has cooled down to a two-year low in November. This has also fueled the hopes of an interest rate cut by the Reserve Bank of India. The next policy review meeting may cut the interest rates.

The Consumer Price Index rose by 3.63% annually in November. It is the slowest pace of rise since November 2014. The Consumer Price Index rose by 4.2% in October.

Demonetization CPI
Source: PTI

Demonetization of larger currency notes can be attributed to the fall in the retail inflation. The consumer demand has severely impacted due to it. Food inflation has fell down to 2.11% in November compared to 3.32% in October.

It also suggests that vegetables prices have fallen by 10%; however the sugar and confectionary has risen by 22%.

The Clothing and footwear inflation has come down to 4.98% in November compared to 5.24% in October. The fuel inflation was at the same levels in both the months, at 2.8%.

This inflation data is well below RBI’s inflation target of 5% for March. This number is also below the medium term RBI target of 4%. Thus, the expectation of interest rate cut has risen.

Prime Minister Narendra Modi’s sudden Demonetization move on November 8 has disrupted daily life and depressed the consumer demand.

Rural retail inflation was recorded 4.13% in November compared to 4.78% in October. The urban inflation was recorded 3.05% in November compared to 3.54% in October.

Many analysts are expecting this falling trend in inflation to continue.

Rupa Rege Nitsure, chief economist at L&T Finance Holdings said that “I expect the demonetization impact to help cool off inflation till February, due to demand contraction. I expect RBI to cut rates in February.”

The Reserve Bank of India kept interest rates on hold last week. It also highlighted inflationary risks emanating from the currency shortages. Issues such as winter crop, global crude prices and increasing volatility in the forex were also the focus points.

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