The retail inflation dropped to a 17-month low of 2.3 per cent in November due to deflation in food and softening in fuel prices.

Mumbai: With consumer price inflation index (CPI) showing strong downward momentum, financial market participants are expecting a shift in RBI’s policy stance to neutral in its next monetary policy in February 2018 and rate cuts in the subsequent meetings.

The retail inflation dropped to a 17-month low of 2.3 per cent in November due to deflation in food and softening in fuel prices. Core inflation too moderated to 5.4 per cent in November from around 6 per cent reported in the previous month.

“The continued downward surprise to the inflation trajectory has created the perfect condition for a softening bias by the MPC. The November inflation outturn has been around 40 basis points lower than RBI’s recently downwardly revised second half of FY19 range of 2.7-3.2 per cent. While we continue to expect a shift in stance to ‘neutral’ before the onset of rate cuts, we acknowledge that the recent downward surprise to inflation has increased the probability of a rate cut in the February meeting itself. We now expect 50 basis point rate cut in 2019,” said analysts at Kotak Securities.

According to Soumya Kanti Ghosh, group chief economic advisor at SBI, growth considerations should now take centre stage as all leading indictors for November are showing significant deceleration, including passenger car sales, commercial vehicle sales and even a decline in demand for oil in November with both demand for diesel, kerosene and LPG declining significantly.

“Oil demand in the current fiscal is half of the decadal demand growth. At this rate, we now expect a change in stance by RBI in February policy and a possible rate cut in April policy, that could be incrementally larger than 25 basis points,” Mr Ghosh said.