Lower Indian inflation increases risk of a September RBI cut

India CPI inflation fell to an 8-month low, to 3.8% y/y in July, down from 5.4% y/y in June, reflecting a high base to an extent, but also much lower food inflation on a seasonally adjusted basis. This was supported by pro-active food management by the government and strong sowing indications. 

WPI inflation meanwhile fell to -4.0%, the lowest since June 1976, and we think WPI inflation could remain in negative territory for another few months. We believe that the central bank is on course to deliver another 25bp repo rate cut in H2 2015, unless incoming data, for example, the monsoon, spring major negative surprises.

"On the balance of risks, a rate cut is expected at the RBI's next meeting at end-September, while the risk of another inter-meeting cut cannot be completely ignored", says Barclays. 

However, recent volatility in INR due to the recent weakening in CNY by the PBoC is likely to be a hurdle for an early delivery of the rate cut. 

"Thus, while the RBI has rightly reiterated that its policy action will remain data dependent, a 25bp repo rate cut in September is expected", added Barclays.