New Delhi: Just about 7.5 per cent of the recent goods and service tax (GST) cuts were reflected in October’s headline inflation print, Nomura said on Thursday. This had an impact of around 0.12pp in lowering October’s retail inflation, which fell to a record low of 0.25 per cent year-on-year.
A full transmission of GST cuts to the retail inflation basket would amount to around 1.6pp reduction, as per Nomura estimates.
Food prices declined-for the fifth consecutive month-by 5 per cent year-on-year in October. The fall in prices was broad-based across other categories, with personal care recording a 1.9 per cent month-on-month decline, transport and communication by 0.6 per cent, clothing , footwear and recreation by 0.2 per cent each, and healthcare by 0.1 per cent.
Nomura noted a sharper drop in the prices of cars (-6.8 per cent month-on-month) and two-wheelers (-4.5 per cent), alongside broad-based price cuts for electronics, clothing and footwear, medical expenses, and toiletries with an average contraction of 0.1 per cent to 0.8 per cent.
While the full impact of the GST cuts is yet to be reflected due to transmission lags and clearance of old inventory, some initial pass through is evident, and further disinflation is likely ahead, Nomura said. The GST cuts came into effect on September 22.
Despite the continued drop in inflation, Nomura considers a policy rate cut at the December monetary policy committee (MPC) meeting a close call. Last month, the MPC kept the policy rate steady at 5.5 per cent. The MPC is scheduled to meet next from December 3-5.
“Our baseline view remains 50bp of cumulative cuts, with the terminal repo rate at 5.00 per cent over the course of the December and February meetings,” said Nomura.
