Inflation seen cooling to one-year low in September

Source: The Economic Times, Oct. 12, 2016

BENGALURU: Inflation in India is expected to have cooled to a one-year low in September as good amonsoon rains kept a lid on food prices, a Reuters poll showed, possibly giving more room to the central bank to cut rates again by the end of this year.

The recently formed Reserve Bank of India Monetary Policy Committee, under new Governor Urjit Patel, cut rates by 25 basis points to 6.25 per cent in a surprise move earlier this month, after inflation hit a five-month low in August.

The latest poll of over 30 economists showed retail inflation probably eased further last month to 4.80 per cent, the lowest since September 2015, from 5.05 per cent in August.

“The favorable impact of the monsoon is now coming through the system. We saw quite a strong deflation in terms of food prices in August. We expect that to continue in September as well,” said Tushar Arora, senior economist at HDFC Bank.

If the reading moderates in line with forecasts, it is likely to fan bets of further rate cuts this year and put the RBI in line with many other major central banks that are also loosening policy.

Another rate cut by the RBI would support government efforts to boost economic growth to above 8 percent to create jobs for millions of unemployed youth.

“The RBI MPC has come out as a more dovish committee… We are expecting one more 25 basis points rate cut by the end of this fiscal year.” said Arora. “There might be a long pause after that, possibly due to a rise in rural demand and demand-side pressures in general next year.”

India’s central bank has softened its stance on the timeline for meeting its inflation goal and lowered the real interest rate target, giving it room to cut rates further.

However, economists in the poll expressed concern that prices could rise quickly after a pay hike for millions of government employees and pensioners.

Wholesale price inflation likely edged up to 3.89 per cent last month versus 3.74 percent in August, the poll found.


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