What latest fall in CPI inflation means for RBI policy meet; is another interest rate cut in offing?

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Updated: August 14, 2019 11:57:18 AM

With retail inflation easing in July, expectations for further rate cuts by the RBI in FY20 continue to strengthen, analysts said.

WPI inflation eases to near 2 year low at in June 2019Even as the core inflation clocked in on the upside, the momentum may not be sustained on account of weak growth impulses, a Kotak report said. (Reuters)

With retail inflation easing in July, expectations for further rate cuts by the RBI in FY20 continue to strengthen, analysts said. Weak CPI-based retail inflation rate for last month provide more space for the RBI’s monetary policy committee (MPC) as the number stays below the central bank’s 4 per cent medium-term target for a twelfth straight month. Even as the core inflation clocked in on the upside, the momentum may not be sustained on account of weak growth impulses, a Kotak report said. “MPC’s acknowledgement to consider growth as the highest priority strengthens our belief of another 25-50 bps cut through the rest of FY2020,” it added. However, concerns around skewed rainfall distribution, volatile stock markets and global issues may continue to remain as significant risks going ahead, it added.

“The incoming trends in food prices need to be cautiously watched, following the recent flooding in some states, rising vegetable prices and continued lag in kharif sowing. Moreover, an unfavourable base effect is likely to contribute to a hardening of food inflation in the ongoing quarter,” Aditi Nayar, Principal Economist, ICRA said.

The MPC will get some headroom to cut rates by another 25-50 bps, owing to the weak domestic and global growth impulses, benign crude price outlook and easy monetary policy by developed market central banks, the Kotak report also said.

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Meanwhile, the retail inflation in July was 3.15 per cent, down from an eight-month high of 3.18 per cent in June, data released by the Ministry of Statistics on Tuesday showed. The analysts polled by Reuters had forecast that retail inflation in July will accelerate to 3.20 per cent from a year ago, a touch above June’s 3.18 per cent.

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