India’s headline inflation eases further in March, RBI likely to hike repo rate by 25 bps in August

India’s headline consumer price inflation eased in March due, owing to benign food prices. CPI inflation decelerated further to 4.28 percent on a year-on-year basis after slowing sharply to 4.44 percent year-on-year in the prior month. Excluding food and fuel, core rate rose to 5.37 percent on a year-on-year basis.

But a considerable part of this is the direct effect of the rise in housing allowances for government employees, which the RBI treats as a statistical issue. Core inflation excluding housing was lower at 4.56 percent year-on-year. Inflation is believed to have reached an inflection point in March, noted ANZ in a research report.

The month registered its first positive sequential reading following three straight negative readings. The combination of a less favorable base and a seasonal reversal in food prices are set to push headline inflation higher in the months ahead. The monsoon season and the effectiveness of the government’s food management policies will also have a bearing on inflation.

“We also remain wary of several upside risks, including rising crude prices, the increase in the minimum support prices (MSP) for agricultural products and a fiscal slippage”, stated ANZ.

Given that the probability of some of these risks materializing is high, the RBI is expected to hike its policy repo rate by 25 basis points in August, in spite of the dovish monetary policy statement by the central bank earlier in the month, added ANZ.

FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest