India's inflation at eight-year low gives RBI scope to cut rates
The consumer price index rose 1.55 per cent from a year earlier last month, according to data released on Tuesday (Aug 12) by the Statistics Ministry, higher than the 1.40 per cent increase forecast by economists in a Bloomberg survey. Inflation slowed to 2.10 per cent in June and had dipped to 1.46 per cent in June 2017.
India's bonds maintained losses with the yield on the 10-year government paper up 4 basis points to 6.48 per cent. The Reserve Bank of India (RBI) aims to keep inflation within 2 to 6 per cent.
The RBI last week kept its repurchase rate unchanged and said it will closely watch the impact of US President Donald Trump's tariffs on Asia's third-largest economy. Citigroup estimates a hit of as much as 0.8 percentage point to annual growth if the levies go up by 50 per cent.
'Given the inflation outlook, the RBI has room to cut rates further by 25-50 basis points in case there is evidence that growth is slowing down significantly due to tariff shocks,' said Sakshi Gupta, an economist with HDFC Bank, in a note to clients. 'For now, we do not expect further rate cuts by the RBI.'
A continued decline in food prices drove the consumer price index lower. Above-normal monsoon rains, that irrigate more than half of the country's farmlands, helped improved agriculture output.
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Food prices, which make up about half of the CPI basket, fell 1.76 per cent in July, the fastest decline since January 2019. Vegetable prices contracted 20.7 per cent from a year ago in July, compared to a decline of 18.92 per cent the previous month.
Core inflation, which strips volatile food and fuel prices from the headline, softened to 4.22 per cent from 4.53 per cent in June, according to calculations from Bloomberg Economics.
The central bank had lowered its inflation forecast for the fiscal year that started in April to 3.1 per cent from 3.7 per cent in its last monetary policy meeting, but warned that the consumer price index may edge above 4 per cent during the January to March period as the base effect wears off.
Both inflation and growth are likely to undershoot the RBI's forecast, suggesting 'scope for further rate cuts' of 25-50 basis points, said Teresa John, an economist with Nirmal Bang Equities. BLOOMBERG
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