Cooling inflation in India boosts expectations for more rate cuts

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Figures show that Inflation probably has cooled in August and is expected to further cool down in future, adding pressure on the already cautious central bank to cut interest rates again to prompt economic growth. With price pressures at record lows, the Reserve Bank of India will lower borrowing costs by at least 25 basis points (bps) at its next policy review, to stimulus economic growth. Calls for a rate cut have grown louder after annual economic growth slowed to 7 percent in the April-June quarter from 7.5 percent in the previous quarter.

A top policy adviser Arvind Panagariya said that 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. Being a net importer and consumer of commodities, India is reaping the dividends of a slump in global prices of coal, oil, iron ore and other basic materials. Annual consumer price inflation, which the central bank tracks to set rates, eased to 3.66 percent in August from a revised 3.69 percent a month ago. The reading was almost in line with 3.6 percent forecast by analysts in a Reuter’s poll and way below the Reserve Bank of India’s 6 percent target for January 2016.

Arvind Subramanian, Modi’s chief economic adviser, warned of looming deflation and called for measures to boost consumer demand and step up investment. RBI Governor Raghuram Rajan, is worried about recovery in price pressures in a country where inflation has been uncomfortable. While food inflation has remained in check notwithstanding 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. Retail vegetable prices, for instance, gained nearly 8.5 percent from July. For the RBI, as for many other central banks around the world facing slow 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 prompt further capital outflows from emerging markets. 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 percent 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. They expect the Fed to not hike rates in September, which means if RBI cuts rates this month then it may aggravate the capital outflow situation.

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