|13 August, 2019

India July retail inflation stays low enough to allow a fifth rate cut

Annual retail inflation in July was 3.15%, down from an eight-month high of 3.18% in June

A cashier checks Indian rupee notes inside a room at a fuel station in Ahmedabad, India, September 20, 2018.

A cashier checks Indian rupee notes inside a room at a fuel station in Ahmedabad, India, September 20, 2018.

REUTERS/Amit Dave

BENGALURU- India's retail inflation rate eased slightly in July, staying below the central bank's 4% medium-term target for a twelfth straight month, strengthening views that there will be a policy rate cut in October.

Annual retail inflation in July was 3.15%, down from an eight-month high of 3.18% in June, data from the Ministry of Statistics showed on Tuesday. 

Analysts polled by Reuters had forecast that retail inflation in July will accelerate to 3.20% from a year ago, a touch above June's 3.18%. 

A PRASANNA, HEAD-FIXED INCOME RESEARCH, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI "Headline and core inflation were slightly higher relative to our estimates. As expected, food prices continue to normalise even as the rise in retail prices is far lower compared with wholesale prices. Core inflation rose partly on the back of higher fuel and gold prices.

"We foresee food inflation edging higher in coming months even as core inflation may subside to around 4% in face of sluggish demand conditions. Still, headline inflation may print 30-50 bps higher than the Reserve Bank of India (RBI) estimates.

"With inflation likely crossing 4% by next year, we expect the MPC to maintain status quo on rates in the October policy. With 110 bps of reduction in policy rates already in place, the focus should be on improving banking transmission and using fiscal policy to address sectoral issues."

GOURAV KUMAR, PRINCIPAL RESEARCH ANALYST, FUNDSINDIA.COM "Consumer Price Inflation has reversed the trend this month and eased to 3.15%. Low inflation is good for consumers. However, sustained low inflation may point to weak demand conditions, which may hurt production growth. Low food inflation also leaves a smaller amount of money in the hands of the farmers, hurting rural demand. A moderate level of inflation, thus, acts as an incentive for companies to produce more.

"In this context, the RBI's rate cuts have come on time. A low-interest-rate scenario may help boost consumption demand and investments, which may, in turn, give a fillip to the economy."

SAKSHI GUPTA, assistant vice-president, HDFC BANK, GURUGRAM "Inflation figures for July are slightly lower than our expectations. Lower food and fuel inflation pulled down the overall figure for the month. This release confirms our expectations that the RBI is likely to cut rates further this year.

"We expect inflation to average at 3.5% in full-year 2020. Inflation could edge up in the second half of the year due to an unfavourable base effect, but even then it is likely to stay below 4%.

"Growth impulses continue to remain weak, especially in sectors such as auto that are considered as a harbinger of economic conditions.

"We expect a mild uptick in the second half of FY20 as the RBI rate cuts filter through, rural income improves slightly, monsoons catch up and as government spending returns support the system, that said, for the year we expect growth at 6.7%."

JOSEPH THOMAS, HEAD RESEARCH, EMKAY WEALTH MANAGEMENT "Retail inflation remains subdued with most of the components indicating not much variation compared with earlier periods. However, we need to make allowance for factors such as a weaker rupee, loss of crops due to heavy rains and the consequent effects on prices, while trying to judge the future inflation levels."

GARIMA KAPOOR, ECONOMIST AND VICE-PRESIDENT, ELARA CAPITAL, MUMBAI "While the core inflation is higher than last month, it remains significantly lower than 6.3% in July 2018, suggesting that demand conditions in the economy remain subdued.

"Some revival in consumption would begin to kick in as government spending gathers pace, farmers receive PM KISAN instalments, banks ease credit and transmit lower rates and improved monsoon leads to a revival in economic activity in rural India. We should begin to see gradual improvement in growth condition from Q4FY20 onwards.

"The government's fiscal space remains constrained given the stiff targets for revenue realisation. We do not expect any significant fiscal stimulus in the form of GST rate cuts for some sectors from the government. The government may look to ease the burden of policy shifts for some sectors by delaying for instance the hike in vehicle registration fees.

"Beyond any special fiscal stimulus, what may help the sector significantly is the pick-up in overall spending. Demand outlook is likely to improve if the government expedites spending."

(Reporting by Chandini Monnappa and Chris Thomas in Bengaluru, Editing by Sherry Jacob-Phillips) ((Chandini.M@thomsonreuters.com; 910867497919;))

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