India's Consumer price inflation unexpectedly dropped in March as concerns over the impact of heavy rains on food inflation proved unfounded. Core inflation remains low, and headline inflation is now comfortably below Reserve Bank's near-term target. This has raised the possibility of an interest rate cut outside the scheduled review cycle for the third time this year.
Headline CPI came in at 5.2% y/y in March, from 5.4% y/y in February. Food prices rose by 6.1% y/y last month from 6.8% in February. Beyond food inflation, price pressures more generally remain subdued.
"The RBI will succeed in keeping inflation below its 6.0% target for January 2016, which should leave the door open for further cuts in interest rates", says Capital Economics.
Weekly data suggests that the worst of the food inflation spike from earlier this year is now behind us. The RBI will also be keeping a close eye on the second round effects of the food price spike on core inflation, but there is little reason to be concerned for now.
"Continued economic slack, as well as the RBI's rising credibility, should keep a lid on core inflation. Accordingly, further rate cuts are still on the cards, with the next 25bp cut possibly coming in an unscheduled meeting before the next scheduled announcement in June", added Capital Economics.
