Retail inflation in India hit a record low in June, according to government data released Wednesday, reflecting a slowdown in the economy and adding pressure for a rate cut, experts said. Retail inflation for June came in at 1.54 percent, down from 2.18 percent in May, according to the official figures, the lowest since the government started tracking it in 2012 in its current format.
New Delhi has kept an inflation target of 4 percent, with room for a 2 percent increase or decrease. This is the first time that the lower end of that band has been breached, experts said. "This is not a good sign for the economy with lack of both manufactured and services demand," said Devendra Pant, chief economist at India Ratings & Research.
"While food deflation is good news for policy makers and consumers, it is not very good news for farmers," he added. "The distress level of farmers with low productivity growth and low price growth is unlikely to reduce and may lead to more farmer unrest and increasing clamour for farm loan waiver from other states."
It boosts New Delhi's demand that the central bank cut the benchmark repo rate - the rate at which it lends to commercial banks - at its next monetary policy review in August. A rate cut encourages consumers to spend, usually causing a spurt in growth, and Indian Finance Minister Arun Jaitley last month called for a reduction in the rate owing to a sharp fall in inflation.
The central bank last cut the interest rate in October by 25 basis points to 6.25 percent, the lowest level since November 2010. That cut came shortly before Prime Minister Narendra Modi stunned the country by removing all 500 (around $7.50) and 1,000 rupee notes from circulation. While the government defended the so-called demonetisation as a necessary strike against corruption, several economists said it slowed down the economy, which clocked in at 6.1 percent for the fourth quarter ending March.
India introduced this month a new national goods and services tax which aims to transform the nation of 1.3 billion people and its $2 trillion economy into a single market.