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India's August retail inflation at five-month low, raises hopes of rate cut

India's Reserve Bank of India's target of 0.5 per cent inflation by March 2017, was easily met due to the fall of fuel index and food inflation. Photograph: (AFP)

WION New Delhi, Delhi, India Sep 13, 2016, 05.49 AM (IST)
Indian consumer inflation fell to a five-month low in August helped by smaller rises in food prices, raising hopes of an interest rate cut next month when the central bank's new governor presents his first policy review. 

Raghuram Rajan, whose tenure as governor of Reserve Bank of India (RBI) ended on September 4, left interest rates unchanged last month.

"The scope of 25 basis points cut in the October policy meet seems to be on the cards," said Shakti Satapathy, an analyst at AK Capital Services in western Mumbai city. 

Annual consumer price inflation eased to 5.05 per cent in August on the back of slower rises in food prices, government data showed on Monday.

The fall in food inflation and the fuel index dragged down the overall numbers to within the comfort zone of the central bank, which has targeted 5.0 per cent inflation by March 2017.

Economists surveyed by Reuters had expected annual retail inflation to come in at 5.5 per cent last month, compared with 6.07 per cent in July.

Food inflation was 5.91 per cent last month, slower than 8.35 per cent recorded in July as prices of pulses, a major staple for India's 1.3 billion population, declined in August.

Separate data released by the ministry of statistics and programme implementation showed annual growth in industrial output contracted 2.4 per cent in July from a year earlier, mainly dragged down by lower production of capital goods and consumer non-durables.

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.

Space for easing? 

Many analysts expect inflation to ease further, offering new central bank chief Urjit Patel room to cut the policy rate at the meeting on October 4.

Indian Prime Minister Narendra Modi faces a challenge to achieve economic growth of around 8 per cent to create jobs for millions of unemployed youth, and industry has long sought lower interest rates.

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.

But some analysts said the RBI may hold off until the end of the year when the inflation picture becomes clearer.

"There is a high probability of a rate cut in December but certainly not in October in my opinion," said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings in Mumbai.


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