Retail Inflation at 2 years low due to demonetization

cash crunch inr 500 inr 1000 notes

The retail inflation in the country dipped to a two year low after the ban on bigger currency notes was announced by the prime minister on November 8th. The main reason behind this was the decrease in customer spending in last month due to demonetization. Prices of the consumer goods rose by 3.63 percent in November, which was the lowest in last 2 years. Food inflation was recorded at 2.11 percent in November, less than 3.32 percent in October 2016.

The move to ban currency notes of INR 500 and INR 1000 was announced abruptly by Prime Minister Narendra Modi and it immediately disrupted the daily life of a lot of customers. Blocked access to bigger currency notes made customers hold back for the bigger purchases and spend the lesser available cash only for the needed stuffs. The demonetization move made 86 percent of the total available cash across the country invalid immediately after the announcement. The inflation rate of November 2016 is way below the mark of 5 percent which was predicted by RBI for March 2017.

The cash shortage has impacted the consumer spends and the demand. As a result, the economists have been expecting the inflation rate to be lower than expected for a few coming months. There have been speculations that the inflation mark suggested by RBI for March 2017 will be around 50 to 70 basepoints lower in the real scenario.

November was also a month where the performance of India’s service industry declined. The services industry in India saw a decline for the first time since July 2015. Along with the services, the factory activities also declined. There were expectations from RBI to cut the interest rates, however, RBI’s announcement to keep the interest rates intact came as a surprise to many. Though, RBI has clarified that the decision on interest rate will be based on long term performance of market after demonetization.

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