Inflation likely cooled in July; June IIP picked up

Economists expect CPI inflation at 4.42% in July from 5.40% in June

Retail inflation likely cooled in July as food prices stayed in check, while factory output grew slightly faster in June, a Reuters poll found this week.

Over the last 19 months, inflation in India has halved from double-digit levels to below the Reserve Bank of India's 6% target, giving the bank room to shave 75 basis points off its key repo rate this year.

But economists and the RBI have warned of the risk of a temporary spike in food prices due to poor monsoon rains.

So far, those fears are unfounded according to the survey of over 30 economists. The poll's median showed consumer price inflation likely eased to 4.42% in July from 5.40% in June.

"Rainfall so far has not been as weak as many had feared, and the government's ample stockpile of crops should help to keep food inflation in check," wrote Shilan Shah, India economist at Capital Economics.

But the India Meteorological Department has forecast a drought in August and September. That could push the cost of food higher and cause the RBI to pause its policy-cutting cycle.

Consumer price rises hit an eight-month high in June, prompting the RBI to hold rates at 7.25% in August. The bank is likely to cut once more before the end of the year, a slim majority of economists in a separate Reuters poll said.

Should the consensus for July's retail inflation rate prove correct, it would be the second lowest on record. But many economists in the poll cautioned against reading too much into the data as statistical base effects played a major role.

"Last year around this time there was a big spike in food prices and, in general, the overall CPI. As a result, even a modest movement this time will lead to a significant softening in the trend," said Siddhartha Sanyal, chief India economist at Barclays.

Analysts in the survey also predicted industrial output growth gathered pace in June, mainly due to a pick up in government spending, rising to 3.5% from May's 2.7%.

Still, India's economy is expected to grow only 7.6% in the fiscal year ending in April 2016, compared to 7.3% last year, due to delays in implementing key fiscal reforms.