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With retail inflation easing, RBI may maintain status quo during rest of the financial year, say experts

Mumbai: The fall in the July retail inflation print is likely to provide some space to the Reserve Bank, which may maintain status quo during the rest of the financial year, say experts.

Retail inflation eased to a nine-month low of 4.17 percent in July from a peak of 5 percent in June.

"The lower-than-expected CPI should provide the space to monetary policy committee to maintain a status quo through the rest of FY19, while assessing the impact of the cumulative 50 bps hike in the repo rates," Kotak Bank said in a report.

The RBI in its third monetary policy review earlier this month, increased the repo rate by 25 basis points to 6.5 percent. In the June review also, there was a similar quantum of hike in the key rate.

HDFC Bank chief economist Abheek Barua said July inflation data is lower than expected and described it as a pleasant surprise. While a favourable base led to the drop in the headline number, the lower-than-expected rise in food prices also pulled the number down, Barua said in a report.

"From the bond market perspective, the lower-than-expected inflation print can reduce the likelihood of a rate hike in October," he said. It could come as a bit of relief and bond yields could decline by 5-10 basis points.

 With retail inflation easing, RBI may maintain status quo during rest of the financial year, say experts

Representative image. Reuters

He, however, said the decline in the yield is likely to be 'very' limited because of the risk off sentiment globally and somewhat weak demand from the foreign investors.

Barua said while the August inflation print can come close to 4 percent, the key numbers to watch out will be that of September and October, which could again inch up again.

"We still expect March 2019 inflation to come close to 5.1 percent," he said.

The Kotak Bank report said even as inflation is expected to stay capped at 5 percent, domestic risks persist amid firm core inflation, the extent of pass-through of MSP prices and weakness in the rupee.

"We remain watchful of the evolution of the recent turmoil in the global financial markets and the consequent contagion on the rupee, which may prompt RBI to take unconventional measures," the report said.

Barua said the lower probability of a rate hike in October can be a mild-negative for the rupee.

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Updated Date: Aug 15, 2018 07:19:11 IST