R. Suryamurthy
A larger-than-expected fall in India’s headline inflation rate in July to an eight-year low has intensified speculation about a potential interest rate cut by the Reserve Bank of India (RBI), though economists remain divided on whether a cut is imminent.
Data released Tuesday showed the Consumer Price Index (CPI) inflation fell to a provisional 1.55% in July, its lowest level since June 2017. The decline was largely driven by a continued year-on-year drop in food prices, which registered a deflation of 1.76%.
The surprisingly soft inflation print, combined with the potential for external economic pressures, has raised the prospect of further policy easing. Joe Maher, Assistant Economist at Capital Economics, said the inflation data “certainly increased the chances of further policy easing this year.”
However, others are more cautious, pointing to a potential rebound in inflation and other economic factors. Aditi Nayar, Chief Economist at ICRA, projects that headline inflation will inch up to around 2.0% in August and that a projected upward trend in the coming quarters would “limit the space for rate cuts.”
Madan Sabnavis, Chief Economist at Bank of Baroda, echoed this sentiment, stating that the inflation numbers were “on expected lines” and that any impact on policy decisions would be “muted.” He highlighted that core inflation, which excludes volatile food and energy prices, remains elevated at 4.2%.
The debate centers on whether the RBI will prioritize the recent low inflation figures or take a more forward-looking approach, considering the expected rebound and the high barrier to easing that the central bank has maintained. As a result, while the July data provides some room for a cut, a consensus on its likelihood remains elusive.
