India’s retail inflation cooled to a record low in July and annual growth in industrial production hit a four-month high in June, bringing cheer to investors fretting that gridlock in parliament is stalling reforms.
Consumer prices rose 3.78 percent year-on-year in July, their slowest pace on record, compared with a 4.42 percent rise predicted by analysts. The sharp cooling, however, was in large measure due to a favourable base effect.
Output at factories, utilities and mines expanded an annual 3.8 percent in June, helped by a sharp rebound in demand for consumer goods.
Wednesday’s economic data comes as a political logjam in parliament has stalled Prime Minister Narendra Modi’s reform agenda, putting in doubt the fate of a major tax overhaul that will create one of the world’s largest single markets.
A crash in global commodity prices has helped inflation slip below the Reserve Bank of India’s (RBI) medium-term target of 6 percent, giving it room to cut interest rates by 75 basis points this year.
The central bank left the policy repo rate on hold last week, leaving the door open to ease further depending on the inflation outlook.
The latest inflation data, coupled with China’s move to devalue its currency, has bolstered hopes of further monetary easing.
“The number is a big downside surprise,” said A. Prasanna, an economist at ICICI Securities Primary Dealership. “This increases chances of RBI cutting interest rate one more time in this fiscal year ending March.”
China’s yuan has fallen almost 4 percent in two days since the central bank announced the devaluation on Tuesday to help resuscitate a slowing economy.
This is bad news for Indian exports, which have fallen for seven straight months. Exporters are already complaining about a relatively stronger rupee that has appreciated by 10 percent on a real trade-weighted basis since the middle of last year.
Indian companies are worried the yuan’s devaluation will flood the local market with cheaper Chinese imports, worsening the bilateral trade deficit.
“Along with the yuan devaluation move, I think there is a case for more (and) not less accommodation,” said Jyotinder Kaur, principal economist at HDFC Bank. “The sooner the Reserve Bank of India steps on the easing pedal, the better it is.”
The RBI, however, is worried about entrenched high inflationary expectations which are feeding into higher wages and other prices.
A central bank survey last week showed households expect consumer inflation to hit 10.1 percent within three months.