MUMBAI (Reuters) - India’s annual consumer price inflation eased to a lower-than-expected 1.54 percent in June, the lowest since a new index was adopted in 2012, from 2.18 percent in May.
Separately, data showed industrial output rose 1.7 percent in May from a year earlier.
A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD
”The continued softness in core inflation should comfort the MPC that underlying price pressures have eased, in addition to the collapse in food prices over the past few months.
”Accordingly, we expect the MPC (monetary policy committee) to cut the repo rate by 25 bps in their August review.
”Subsequently we expect the MPC to be on a wait and watch mode through this financial year. We expect headline inflation to top around 4 percent by March 2018 as food inflation reverts to more normal levels.
”Further price data is likely to be clouded by both GST (goods and services tax) and government house rent allowance increases.
“Lastly, with major central banks likely starting to contract balance sheets by last quarter of this calendar year, global financial markets could turn more volatile from hereon. Taking all this into consideration the MPC would prefer to stay on sidelines after easing rates in August.”
”Given the current inflation trajectory we reiterate our call of a 25 basis points rate cut in August policy.
”The momentum of overall inflation will pick-up slightly from August given higher housing allowances but it is unlikely to pose any upside risk to the upper band of RBI’s 3.5-4.5 percent inflation target in the second half of the year (October-March).
“Core inflation is at a series low since 2012, which might go up slowly but we don’t see any sharp upside as a pick-up in demand is still not robust and the output gap is negative.”
”It is slightly higher than my expectations. I was at 1.4 percent, and that is largely because of vegetable prices. I was expecting the increase to be on the lower side.
“Otherwise, we do expect a rate cut of 25 basis points in the August policy. There is a significant possibility that overall inflation will be significantly lower than RBI’s forecast. Unless, there is some major disappointment in monsoon, I don’t see any upside risk to inflation by March 2018.”
SUDHAKAR PATTABIRAMAN, HEAD OF RESEARCH OPERATIONS, WILLIAM O‘NEIL INDIA
”RBI does not believe that GST will increase inflation yet, but if you observe other countries where GST was implemented, it definitely created an upward pressure on inflation.
”We also have the 7th Pay Commission which increased the house rent allowance (HRA). Both factors would create upside risk for the baseline inflation.
“The RBI will be monitoring the progress of GST and the monsoon this year.”
SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES
”This print will provide room for RBI to cut repo rate by 25 bps, but scope for further rate cuts would be restricted as the RBI would likely wait-and-watch the impact of HRA (house rent allowance) increases over the next few months.
”Recent increase in vegetable and cereals prices would also keep the RBI cautious. Further, developed markets have been signalling a reversal in their policy stances for some time.
“While we expect the RBI to cut by 25 bps it would be in some sense a ‘hawkish’ cut.”
Reporting by Tanvi Mehta, Abhirup Roy, Suvashree Dey Choudhury, and Jessica Kuruthu; Compiled by Rafael Nam