India’s headline inflation accelerates sharply in July, RBI likely to cut repo rate by 25 bps in Q4

India’s consumer price index inflation accelerated sharply in July. The nation’s headline inflation came in at 2.36 percent year-on-year, a sharp rise following a slowdown in the earlier three months. The momentum also strengthened because of a rise in vegetable prices. The increase in food inflation is unlikely to be a cause for concern as it was greatly because of transient factors.

Food inflation is expected to reverse in September because of the arrival of new food supply following a normal monsoon. In the meantime, the prices of other components of the CPI food basket, such as cereals and pulses continue to be benign because of excess supply conditions.

Core inflation came in at 3.96 percent year-on-year in July, a bit higher than 3.85 percent year-on-year in June. Some GST-related effect was seen in many services segments such as “Household Goods and Services” and “Recreation and Amusement”. Moreover, housing inflation also firmed because of a rise in housing allowances for civil servants that influences the housing component in the CPI.

However, a sharper rise in core inflation was curbed by a drop in transportation costs, price wars in the telecommunication sector, and low input prices for industry as whole amid stable commodity prices. In all, the trend in core inflation continues to be in line with subdued activity indicators.

The confluence of a subdued growth impulse, good monsoon, rupee strength and low oil prices shows that inflation is likely to remain comfortable in the RBI’s target range. The central bank is expected to tolerate the rise in housing inflation as it is greatly mechanical  in nature, noted ANZ in a research report.

The confluence of a weak growth impulse, good monsoon, rupee strength and low oil prices indicates that inflation is set to remain comfortable within the RBI’s target range. The RBI will likely tolerate the increase in housing inflation as it is largely mechanical in nature. The core inflation print reaffirms our view that the RBI will deliver another 25bps cut in the repo rate in Q4 2017.

“Our assessment suggests that the inflation trajectory is likely to remain benign. We expect the Reserve Bank of India (RBI) to cut the policy rate by another 25bps to 5.50% in Q4 2017”, added ANZ.

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