Drop in India's CPI inflation due to GST reforms higher than expected

CPI inflation moderated to all-time low of 0.25 per cent year on year (YoY) in October this year. Excluding gold from headline CPI turned the print negative at minus 0.57 per cent YoY.

Meanwhile, core CPI didn’t change much at 4.33 per cent in October compared to 4.36 per cent in September, with gold price playing spoilsport as core CPI excluding gold came at 2.6 per cent.

Goods and services tax (GST) rationalisation has also led to reduction in CPI inflation, the newsletter noted. “We earlier estimated that CPI will moderate by around 65-75 bps owing to GST. However, the decline in CPI inflation due to GST has been higher at around 85 bps,” it said.

Out of 22 states, inflation in 12 states is in negative zone, while in all other states except Kerala, inflation is below 3 per cent.

India’s CPI inflation trajectory calls for a strong case for decisive actions. The higher growth numbers for Q2 and the October inflation print will pose a serious dilemma for the central bank for a rate action in December, the newsletter remarked.

“We believe December rate cut is a close call and not a given. It will entirely depend on how RBI [Reserve Bank of India] is able to communicate to the market a rate cut when growth numbers are in excess of 7 per cent,” the newsletter said.

“Also, liquidity needs to be better calibrated going forward for smooth transition and transmission as credit demand looks set to trump deposit growth,” it added.

ALCHEMPro News Desk (DS)