Inflation dips to 2-year low at 3.63 per cent

New Delhi: India's retail inflation cooled to a two-year low in November after Prime Minister Narendra Modi’s shock currency replacement programme dented consumer spending, fuelling hopes of an interest rate cut by the RBI at its next policy review.

Consumer prices rose by an annual 3.63 per cent last month, their slowest pace since November 2014, government data showed on Tuesday.

Economists surveyed by Reuters had expected prices to rise 3.90 per cent year-on-year, compared with a 4.20 gain in October.

Food inflation was 2.11 per cent last month, lower than October’s 3.32 per cent.

Mr Modi’s sudden move on Nov. 8 to cancel Rs 500 and Rs 1,000 banknotes, which accounted for 86 per cent of the cash in circulation, 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 RBI’s 5 per cent inflation target for March 2017 as well as the medium-term target of 4 per cent.

With the cash shortage hitting consumer demand, some economists expect headline retail inflation to stay below 4 per cent in coming months and undershoot the RBI’s March target by at least 50 basis points.

“I expect the demonetisation 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.”

Indian services activity too plunged into contraction in November for the first time since June 2015.