Aug CPI to fall further; RBI to cut 25 bps on Sep 29: experts

CPI rose 3.78% y-o-y in July, it's slowest pace on record

Retail inflation fell to record low level in July and is likely to fall further in August, leading brokerages said, adding that the Reserve Bank is likely to go for a 25 basis points rate cut in its September review.

According to Bank of America Merrill Lynch (BofA-ML), DBS and SBI Research, the low print in inflation data suggests that deflationary pressures are building even beyond base effects and the CPI inflation is on track to achieve RBI's under 6% January 2016 target.

As per official figures, retail inflation rose by 3.78% year-on-year in July, slowest pace on record, helped by lower food prices of certain items including of vegetables, fruits and cereals.

"We continue to expect the RBI to cut 25 bps each on September 29 and February 2 with inflation well set on its 'under-6%' January-2016 target," Bank of America Merrill Lynch said in a research note.

According to DBS, although base effects were expected to temper July's inflation data, there was also a significant pullback in the sequential pace as inflation rose 0.6% on a month-on-month basis, half the pace of the month before.

"Odds of another rate cut before end-year have risen after yesterday's CPI numbers," DBS research note added.

Meanwhile, according to SBI research, the downtrend in CPI inflation figures is likely to continue and the August CPI numbers are expected to be sub 3.5%.

"We now expect RBI to go for a 25 bps repo rate cut in September policy," SBI Research said in a note and added that this may not be the last in the series, if inflation continue to surprise on the downside.

After three cuts in seven months, the RBI earlier this month, decided to keep the benchmark lending (repo) rate unchanged at 7.25% as also the cash reserve ratio (CRR) at 4%.

Reserve Bank Governor Raghuram Rajan, however, had indicated that he could go for a rate cut soon if macro-economic data is favourable and monsoon turns out to be good.