India’s inflation likely to decelerate in Q3, RBI may cut rates by 25bp in Q4

In August, India’s consumer price index inflation decelerated sharply, dropping over 100 basis points from the earlier print to 5.05 percent year-on-year, because of favorable base effects and lower food prices. Food inflation dropped to a five-month low of 5.8 percent year-on-year, following a rise in April-July 2016. It contributed only 2.8 percentage points to headline CPI inflation in August. Core CPI inflation had stayed quite anchored at 4.6 percent year-on-year. In all, given that the July-August CPI data averaged 5.6 percent year-on-year, the third quarter CPI inflation seems set to decelerate lower than the second quarter’s average of 5.7 percent, possibly closer to the first quarter’s average of 5.3 percent.

The uptick in food prices observed in the second quarter is likely to wane further in the months ahead due to decent monsoon season and better sowing of summer crops in 2016, said Barclays in a research note. This is expected to ease inflationary pressures and underpins the projection of multiple sub-5 percent inflation readings in the second half of 2016, added Barclays.

Separately, India’s WPI was up modestly in August to 3.74 percent year-on-year from July’s 3.55 percent. Wholesale inflation was up mainly because of rises in manufactured products and energy prices that rose at 22-month highs. While the wholesale price index has remained in positive territory since June 2016, demand pressures have remained weak, showing only a gradual rebound in economic activity, according to Barclays.

“Accordingly, we continue to expect the Reserve Bank of India (RBI) to lower rates by 25bp in Q4 16, to 6.25 percent”, added Barclays.

But, the central bank is expected to refrain from large rate cuts in the months ahead; however, it might maintain a generally supportive stance on liquidity. The new RBI Governor Urjit Patel is not expected to set off any major change in the policy framework or the central bank’s monetary policy stance in the near term, stated Barclays.