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FxWirePro Poll: Subdued inflation and negative demonetisation effect to pressurize RBI for rate cut in February

India’s inflation continued to remain subdued during the month of November, exerting deeper pressure on the Reserve Bank of India (RBI) to undertake easing policy in the next 2-day bi-monthly monetary policy scheduled to be held on February 7, an FxWirePro Poll showed Monday. 9 out of 10 economists polled at FxWirePro remained optimistic for a RBI rate cut in February 2017.

India’s consumer prices tumbled in November because of weak food prices. Consumer price inflation in India slowed to 3.63 percent year-on-year in November, owing to the drops in prices of food. The downward surprise was mainly because of fruits and vegetables.

Additionally, India’s wholesale price inflation fell during the month of November, at the slowest pace in five months. However, it came in higher than what market participants had priced in initially.

India's wholesale prices rose 3.15 percent year-on-year in November, its slowest pace in five months, data released by the Indian Ministry of Commerce and Industry showed Wednesday. The data compared with a 3.12 percent annual rise forecast by economists in an FxWirePro poll.

Moreover, the country’s inflation is anticipated to have eased further in coming months due to the failure of demonetisation. This masterstroke brought in a pool of electronic transactions that deprived many of hand-to-hand cash exchanges, thus leaving the citizens in a wide array of lower spends overall.

The lower spread of cash transactions, coupled with a maximum limit on ATM withdrawals has pressurised the prices of many retail commodities, including luxuries and real estate prices as well.

"The RBI is expected to slash its benchmark repo rate by 25 basis points to 6.00 percent, following a decline in inflation expectations," said Chintan Master, Director, Finrex in an exclusive interview with FxWirePro last month.

The 2017-18 Union Budget, expected to be unveiled by February 1, 2017 is likely to incorporate a slash in the income tax bracket as well, allowing consumers to combat the negative effects of demonetization. The policy implementation is expected to boost consumer spending, allowing door for some recovery in inflation expectations.

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