India August inflation likely rose driven by higher food prices, but rate cuts still on the cards: Poll

The expected rise in inflation comes despite the price of oil, India’s biggest import, falling by more than 7%.

Reuters September 10, 2019 11:52:59 IST
India August inflation likely rose driven by higher food prices, but rate cuts still on the cards: Poll
  • Food prices have been rising largely due to the impact of inconsistent rainfall on crops

  • Core inflation also likely got a boost last month from a surge in gold prices, which recently hit a six-year high

  • The expected rise in inflation comes despite the price of oil, India's biggest import, falling by more than 7%

Bengaluru: Indian retail inflation likely rose to a 10-month high in August primarily driven by higher food prices, while staying below the Reserve Bank of India’s (RBI) medium-term target of 4 percent, a Reuters poll of economists showed.

Food prices, which account for nearly half of the inflation basket, have been rising largely due to the impact of inconsistent rainfall on crops.

The median forecast from over 40 economists polled between 4-9 September showed retail prices rose at an annual rate of 3.3 percent in August, up from 3.15 percent in July and the highest since October 2018. Forecasts ranged between 3.00-3.50 percent.

India August inflation likely rose driven by higher food prices but rate cuts still on the cards Poll

Representational image. AFP

“Rising food prices have been leading consumer price inflation up this year - a trend that is likely to have received a further lift in August from a supply shock to food prices from heavy flooding in some south-western states,” said Prakash Sakpal, Asia economist at ING.

The expected rise in inflation comes despite the price of oil, India’s biggest import, falling by more than 7 percent.

Core inflation, which excludes food and energy prices, also likely got a boost last month from a surge in gold prices, which recently hit a six-year high on rising worries about a deeper global economic downturn.

If the forecast for 3.3 percent headline inflation is realised, it will have held below the central bank’s medium-term target of 4 percent for 13 straight months, the longest stretch below the target since the introduction of the index in January 2012.

Relatively muted inflation, along with the slowest pace of economic growth since 2013 during the last quarter, might be enough to push the RBI to cut interest rates for a fifth consecutive time next month.

The central bank reduced its policy rate to 5.40 percent on 7 August and has lowered the rate by 110 basis points this year.

“The RBI is caught in a situation where (economic) growth is expected to be lower than what they have forecast and inflationary pressures will still remain under control though higher than their estimate,” said Aastha Gudwani, India economist at BofAML, who forecasts a 35 basis point cut at the policy review due on 4 October, and a further 15 basis point cut in December.

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