India’s headline inflation slows further in June, RBI likely to cut interest rate further by 25 bps in August

India’s headline and core inflation both slowed further in June. The consumer price inflation decelerated to a series low of 1.54 percent year-on-year. Apart from the benefit of a favourable base effect, benign food prices is the main reason for moderation. On the contrary to the customary seasonal pattern, food inflation has been shrinking because of favourable supply conditions due to a solid harvest. Good progress in the on-going South-west monsoons minimises the risk of a reversal in this favourable trend, noted ANZ in a reason.

The moderating trend of core inflation is also noteworthy. On a year-on-year basis, core inflation printed at 4 percent, easing the RBI’s concern that it was sticking around 5 percent. The moderation appears to be in line with the on-going softness in a variety of indicators such as the PMI, bank lending, industrial output and auto sales, stated ANZ.

Significantly, the consumer price inflation has eased in every quarter since June 2016 and printed below the lower bound of the RBI target range of 2 percent to 6 percent in June. However, inflation has probably bottomed out and is likely to rise gradually from July. The rising in housing allowance for civil servants that directly influences the housing component of the CPI basket and less supportive base effects will push inflation higher.

However, the overall rise will be limited by the strength of the rupee, lower oil prices and a negative output gap. The collapse in inflation confirms the view that the RBI would deliver a 25 basis point cut in the key interest rate in August meeting, added ANZ. Additional easing would depend on the evolution of core inflation and its durability around 4 percent.

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