Inflation seen easing, industrial output stable

Indian consumer inflation was expected to have slowed to a record low in August, hit by slack global energy costs and low food prices, a Reuters poll found, likely increasing pressure on the central bank to cut rates at its meeting later this month.

The poll of about 30 economists, conducted this week, forecast inflation to ease to 3.6 per cent in August year-on-year, from July’s already all-time-low of 3.78 per cent.

Signs of inflation cooling rapidly, from double digit rates almost two years ago, will likely increase calls for the Reserve Bank of India (RBI) to cut interest rates at its September meeting.

Three cuts this year, prompted by low inflation and slackening economic momentum, have brought the key repo rate down to 7.25 per cent.

RBI Governor Raghuram Rajan, however, has remained firm in his assertions the Bank will not act again until the full impact of the monsoon season - stretching from July to September - is known.

“This is the second year of drought or low rainfall conditions but food inflation has almost halved,” said Bhupesh Bameta, economist at Quant Capital in Mumbai. “We’ve not had a sustainable period of low rainfall, so the damage to crops is not that high.”

In July, retail food inflation slowed sharply to 2.15 per cent from 5.4 per cent in June, despite the country recording 13 per cent overall lower rainfall than average this year.

The forecasts for lower inflation were accompanied by predictions of steady factory growth in July, the same poll showed.

India’s economy grew a historically modest seven per cent in the previous quarter but industrial output has generally been strong. It is expected to have increased 3.5 per cent in July, from a year ago.

“Month on month, there is some volatility in the numbers but the broader sense of a gradual investment-led recovery is definitely visible,” said Bameta.

Factory growth has been positive since November.

However, the possibility of higher interest rates in the United States is likely to weigh on Rajan’s thoughts ahead of the RBI’s

September 29 meeting in which economists said there is a 60 per cent probability of policy easing.