Retail inflation nosedives in wake of India’s cash crackdown

India’s retail inflation cooled to a two-year low in November after Prime Minister Narendra Modi’s shock currency replacement program dented consumer spending, fueling hopes of an interest rate cut by the central bank at its next policy review.
Consumer prices rose by an annual 3.63 percent last month, their slowest pace since November 2014, government data showed on Tuesday. Economists surveyed by Reuters had expected prices to rise 3.90 percent year-on-year, compared with a 4.20 gain in October.
Food inflation was 2.11 percent last month, lower than October’s 3.32 percent.
Modi’s sudden move on Nov. 8 to cancel 500-rupee and 1,000-rupee banknotes, which accounted for 86 percent of the cash circulating in Asia’s third-largest economy, has disrupted daily life, depressing consumer demand.
People struggling to get new notes are holding back on spending, except for immediate and urgent needs.
November’s reading is way below the Reserve Bank of India’s (RBI) 5 percent inflation target for March 2017 as well as the medium-term target of 4 percent.
With the cash shortage hitting consumer demand, some economists expect headline retail inflation to stay below 4 percent in coming months and undershoot the RBI’s March target by at least 50 basis points.
“I expect the demonetization impact to help cool off inflation till February, due to demand contraction,” said Rupa Rege Nitsure, chief economist at L&T Finance Holdings in Mumbai.
“I expect RBI to cut rates in February.”
In a sign of things to come, Indian services activity plunged into contraction in November for the first time since June 2015, due to a sharp decline in demand, a survey showed, while factory activity also slowed.
Still, the RBI surprised investors last week by keeping interest rates on hold, saying the impact of the currency swap program on the economy would be transitory. The central bank also flagged inflationary risks emanating from the currency shortages that could endanger the winter crop and an uncertain outlook for global crude prices and increasing volatility in the foreign exchange market.
Crude oil prices this week hit their highest level since mid-2015, after the world’s top crude producers agreed to the first joint output cut since 2001.
The US dollar’s rally against emerging market currencies, such as the rupee, on bets that Donald Trump will adopt policies to spark growth, has also raised the specter of imported inflation.
“There is limited scope for deeper easing,” said Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership.
RBI official held
Investigators arrested a central bank official Tuesday for allegedly illegally exchanging old bills worth some Rs15 million ($222,000) for new ones.
India’s Central Bureau of Investigation arrested K. Michael, an official at the Reserve Bank of India, in the southern city of Bangalore after they found him working with a state bank employee to convert old banknotes without legal documentation.
“K. Michael... has been arrested for his alleged involvement in converting old 500-rupee and 1,000- rupee notes worth Rs15 million into 100-rupee notes,” a CBI official told AFP on the condition of anonymity.
Investigators also found him hoarding Rs16 million in new 500-rupee and 2,000-rupee notes. The RBI said Michael was a junior official and had been suspended.
“The concerned employee has been suspended,” S.S. Mundra, an RBI deputy governor, told reporters. “We have instituted investigation and due action will be taken once the details are known.”
The CBI has also registered criminal cases of cheating against several public and private bank employees. Seven middlemen in Bangalore were also arrested for “converting unaccounted cash” and more than Rs9 million were recovered, an official told AFP.

Source: Arab News