Inflation seen cooling in December as cash crunch hit demand

Last Updated: Wed, Jan 11, 2017 13:17 hrs
A woman looks at an item as she shops at a food superstore in Ahmedabad

Inflation in India is expected to have cooled to a two-year low in December as the government's surprise currency crackdown rattled the economy and severely hurt consumption, a Reuters poll found.

Retail inflation likely eased to 3.57 percent from a year earlier, from 3.63 percent in November, the poll of over 30 economists showed.

That would be the lowest since November 2014, and well below the Reserve Bank of India's near-term target of 5 percent by March 2017.

Prime Minister Narendra Modi's decision on Nov. 8 to outlaw high-value bank notes, aimed at curbing corruption and tax evasion, has forced the nation's 1.2 billion people to scramble to exchange old notes for new and left many companies' cash-reliant supply chains in tatters.

The government insists the impact from the move will be short-lived, but many private economists are trimming their GDP forecasts, reckoning it will linger for one more year.

"We expect headline CPI inflation to fall, primarily due to a significant sequential fall in the prices of several food items and many other perishables on account of the cash crunch created by demonetization," said Rupa Rege Nitsure, group chief economist at L&T Financial Services in Mumbai.

India's central bank unexpectedly left its repo rate unchanged at 6.25 percent last month, saying the blow from the cash squeeze may be transitory and expressing concern over the rising risk of inflation from higher global oil prices.

If inflation remains below the near-term target, it will give the central bank room to make a rate cut at its next meeting on Feb. 8.

Industrial output likely accelerated 1.3 percent in November from a year ago, after falling 1.9 percent in October, the poll also forecast.

"The impact of the demonetization drive will be better reflected in weak December readings," wrote Radhika Rao, economist at DBS Bank, in a note.

"Subdued capital goods output is likely to be accompanied by a slow patch in consumer durables and non-durables production as inventories build on slower demand."

Wholesale price inflation is expected to have picked up last month to 3.50 percent from 3.15 percent in November, according to the poll.

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