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Business News/ Politics / Policy/  Cooling inflation in India to fuel calls for rate cut
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Cooling inflation in India to fuel calls for rate cut

With price pressures at record lows, expectations are building that the RBI will lower borrowing costs by at least 25 bps at its next policy review

Annual consumer price inflation likely eased to 3.6% in August due to lower fuel prices, from a record low of 3.78% in July, according to analysts polled by Reuters. Photo: APPremium
Annual consumer price inflation likely eased to 3.6% in August due to lower fuel prices, from a record low of 3.78% in July, according to analysts polled by Reuters. Photo: AP

New Delhi: India’s inflation probably cooled further in August, data on Monday is expected to show, adding pressure on its cautious central bank to cut interest rates again as soon as this month to spur economic growth.

With price pressures at record lows, expectations are building that the Reserve Bank of India (RBI) will lower borrowing costs by at least 25 basis points (bps) at its next policy review on 29 September, after three cuts earlier this year.

Calls for a rate cut have grown louder after annual economic growth slowed to 7% in the April-June quarter from 7.5% in the previous quarter. And some economists fear real growth is more sluggish than official figures suggest.

Arvind Panagariya, a top policy adviser to the government, said last week said the economy needed 50-100 bps of rate cuts. Similar calls were made by Indian business leaders at a meeting with Prime Minister Narendra Modi last Tuesday.

Annual consumer price inflation, which the central bank tracks to set rates, likely eased to 3.6% in August due to lower fuel prices, from a record low of 3.78% in July, according to analysts polled by Reuters.

Wholesale prices, another inflation gauge, are expected to have fallen for a 10th straight month, tumbling 4.40% on-year compared with a 4.05% fall in July.

Indeed, the rapid deceleration in prices has ignited a debate in New Delhi whether Asia’s third-largest economy is heading towards deflation.

Arvind Subramanian, Modi’s chief economic adviser, early this month warned of looming deflation and called for measures to boost consumer demand and step up investment.

RBI governor Raghuram Rajan, however, is worried about a resurgence in price pressures in a country where inflation has been notoriously volatile.

While food inflation has remained in check despite below average summer monsoon rains, prices of some staples such as onions and lentils are racing up. Entrenched expectations of high inflation also are feeding into higher wages.

“Yes, there has been moderation in some prices, but that’s not signalling deflation," said N. Bhanumurthy, senior economist at the NIPFP policy think-tank in New Delhi. “In fact, we are not anywhere near that."

But for the RBI, as for many other central banks around the world facing sluggish growth, much will depend on whether the US Federal Reserve raises interest rates this week for the first time since 2006.

Easing policy at the same time as the Fed is tightening, however modestly, could spur further capital outflows from emerging markets.

While some analysts believe the chances of a September hike have eased amid fears of a China-led global slowdown, any fresh burst of financial market volatility following the Fed’s decision on 17 September could force the RBI to stand pat.

“If there is a (US) hike, then market reaction will need to be monitored," said A. Prasanna, an economist with ICICI Securities Primary Dealership Ltd. “I still expect markets to calm down by the time of RBI policy date."

The RBI has lowered rates by a total of 75 bps since January. However, it left the policy repo rate on hold at 7.25% at its last meeting, tying future cuts to the inflation outlook.

Wholesale price data will be released at 0630 GMT on Monday, with consumer prices at 1200 GMT. Reuters

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Published: 14 Sep 2015, 08:46 AM IST
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