India's consumer inflation likely to ease; rate cut seems closer

India’s consumer price inflation, due to be released Tuesday, is expected to have eased in June, raising the probability of a rate ease by the Reserve Bank of India in the near term.

However, the recent announcement by RBI Governor Raghuram Rajan of his unwillingness to continue in the office after September has complicated the market expectations, at least in the near term. Moreover, the time period that will require for a new incumbent to step into Rajan's shoes would further delay any clarity over monetary policy's direction.

June CPI inflation due on Tuesday is expected to marginally ease to 5.6 percent y/y from May’s 5.8 percent but a shade above Jan-May average of 5.4 percent. Food prices are likely to account for a bulk of the pick-up, consisting of perishables (vegetables etc.) and non-perishables, especially sugar and related products. Domestic fuel prices have also risen in the month, mirroring global trends, DBS reported.

Further, the arrival of strong rains across all parts of the Indian sub-continent, has raised hopes of a slowdown in agricultural food prices. However, upcoming public sector wage and pension increases are likely to cushion any further fall in inflation.

Further, the central bank is likely to be in-transition mode until late-third quarter of 2016, with the new Governor likely to be announced later this month, followed by the monetary policy committee members, possibly in August. Given this factor and the recent uptick in inflation readings, it looks unlikely that policy rates will be tweaked in the interim.

"We thereby defer our rate cut call to 4Q16 (last quarter of 2016), when further clarity on the policy leaning of the new Governor is discernible, inflation targets are reviewed (if any) and the new policy committee takes charge of rate decisions," DBS commented in its research note.

Meanwhile, headline industrial production (IP) is likely to rise 0.3 percent y/y in May from -0.8 in April. Contribution of electricity generation in the overall IP is likely to decline 0.5 percentage point in May from average 1.3 percentage point in Mar-Apr, inferring from the cues under the core industries index. Weak industrial activity here, however, diverges from the relatively firm manufacturing activity under the GDP series, renewing doubts on the latter, the report mentioned.