August Retail Inflation Seen Easing After Good Rainfall

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New Delhi: Consumer inflation is expected to have eased to a four-month low in August, helped by smaller rises in food prices, but it likely remains too high for a rate cut next month when the central bank’s new governor presents his first policy review.

Consumer prices, which the Reserve Bank of India tracks as it sets interest rate policy, likely rose 5.5 per cent in August, according to a Reuters poll of economists, compared with an increase of 6.07 per cent in July.

Data on the consumer price index and industrial output will be released at 1200 GMT Monday

Economists predict annual growth in industrial output decelerated to 1.7 per cent in July from June’s eight-month high of 2.1 per cent.

Even if retail inflation eases as much as anticipated, it will still be above the RBI’s March 2017 target of 5 per cent, despite low global crude prices.

In Asia, China’s annual consumer inflation slowed to 1.3 per cent in August, while Indonesia’s pace slowed to a near seven-year low of 2.8 per cent.

But in India, prices of pulses, a major staple for its 1.3 billion population, in July were 27 per cent higher than a year earlier, pushing food inflation to near 8 per cent in July.

Space for easing?

Aditi Nayar, an economist at ICRA, the Indian arm of rating agency Moody’s, said better rains in July have improved chances of a good harvest softening food price inflation.

“The imminent easing of CPI inflation is likely to create space for additional monetary easing of 25 basis points in the remainder of 2016,” she said adding “the timing of a cut remains uncertain.”

Analysts are divided whether new RBI governor Urjit Patel will oblige the government and industry, who seek a rate cut to boost private lending. Raghuram Rajan, whose tenure as governor ended on September 4, left interest rates unchanged last month.

Prime Minister Narendra Modi faces a challenge to achieve economic growth of around 8 percent to create jobs for millions of unemployed youth.

Annual economic growth in Asia’s third largest economy slowed to 7.1 per cent in April-June from 7.9 per cent the previous quarter, putting Modi’s target further out of reach.

“A sharp downside surprise in August inflation of low 5 percent or break below will raise hopes that Governor Patel’s first policy meeting will begin with a rate cut,” said Radhika Rao, an economist at DBS Bank, adding that the RBI is more concerned about inflation than growth.