India’s retail inflation slowed further to a 19-month low in January while factory output, dragged down by a negative base effect, remained subdued in December, opening more space for the central bank to cut interest rates.

Data released by the Central Statistics Office showed consumer price index or CPI-based inflation stood at 2.05% in January against the 18-month low of 2.11% in December, while factory output recovered to 2.4% in December from 0.3% in November.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on 7 February changed its stance from calibrated tightening to neutral and cut the policy rate by 25 basis points on the back of benign headline retail inflation and slowing global growth.

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RBI governor Shaktikanta Das said at the time that the shift in the stance of monetary policy provides flexibility and the room to address challenges to sustained growth of the Indian economy over the coming months, as long as the inflation outlook remains benign. “The decisions of the MPC in this regard will be data driven and in consonance with the primary objective o monetary policy to maintain price stability while keeping in mind the objective of growth," he had added.

While food inflation continued to be in negative territory in January, the RBI will breathe easy as core inflation— excluding food and fuel prices— decelerated for the fourth consecutive month to 5.4% in January against 5.6% a month ago.

The MPC revised its retail inflation projection for the first half of the next fiscal lower to 3.2-3.4% from 3.4-4.2% earlier. It, however, ignored the impact of both high core inflation and an expansionary fiscal policy, inviting criticism from some quarters.

Rating agency Crisil Ltd’s chief economist D.K. Joshi said retail inflation has undershot expectations in January which has opened up the possibility of another rate cut in April. “Beyond that, we expect food inflation to climb to positive territory and goad headline inflation upwards. After that, monetary policy action is a tough call, because the moving parts are many, and data will hold sway," he added.

Within the index of industrial production (IIP), mining output shrank 1%, while manufacturing and electricity output grew 2.7% and 4.4%, respectively. Items with the steepest negative contribution to IIP growth included diesel, copper bars and raw materials for drugs.

While capital goods, which represent investment demand in the economy, recovered from negative territory a month ago, a sharp contraction in primary goods to a 44-month low and sustained contraction in intermediate goods for two consecutive months have dragged overall industrial growth lower for December.

The base effect, which turned adverse starting November, is expected to continue for the rest of the financial year ending March. Average IIP growth in the second half (October-March) of the last fiscal, at 6.1%, was much higher than the first half (April-September) at 2.6%. Average IIP growth in April-December in the current fiscal is 4.6% against 3.7% a year ago.

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