India’s consumer price inflation accelerates in August, RBI likely to cut repo rate in October

India’s consumer price inflation accelerated in August. The headline inflation rose to 3.36 percent year-on-year in the month from July’s 2.36 percent. Market projections were for inflation to have accelerated to 2.24 percent.

CPI inflation rose further in August amidst higher food prices, which were mainly because of seasonal increases in vegetable prices. In the meantime, the prices of protein-related items and pulses stayed benign. Food prices are expected to moderate going forward with the arrival of fresh supply beginning this month, noted ANZ in a research report.

Meanwhile, core inflation rose to 4.5 percent year-on-year in August, accelerating from July’s 4.08 percent. The momentum in core inflation also strengthened with the prices of 40 percent of items in the core basket edging up from the earlier month. The effect from GST implementation was visible in some segment such as “Household Goods and Services” and “Recreation and Amusement”. Meanwhile, transportation costs were up because of a rise in domestic fuel prices. Housing inflation also rose on the back of rise in housing allowance for civil servants.

The pick-up in core inflation was because of government policy and fuel price adjustments. More significantly, the core print does not signify any demand side pressures. Lead indicators, such as the services PMI and bank credit, continue to indicate towards sluggish growth and a consistent negative output gap, said ANZ.

The rise in core inflation might raise the odds of the Reserve Bank of India keeping the key interest rate at their next meeting. But a combination of subdued growth, good monsoons, rupee strength and stable oil prices implies that the current rise in inflation is transitory.

“In our view, the RBI will look past the transient factors driving inflation and make a 25bps cut in the repo rate at their October meeting”, added ANZ.

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