India inflation near 3-year lowReuters . New Delhi
India’s wholesale inflation unexpectedly fell in July to a near three-year low but economists doubt the drop will be enough to persuade the RBI to cut interest rates at its September meeting to try to revive the struggling economy.
Inflation dropped to 6.87 per cent in July from 7.25 per cent in June as domestic petrol and vegetable prices fell in July. But global oil prices have been rising since then and drought in some parts of India is threatening fresh inflationary pressures.
In addition, core inflation, which excludes food and fuel prices, rose in July to 5.44 per cent from 4.9 per cent in June, economists estimated.
These factors will push inflation higher again and make the Reserve Bank of India cautious about relaxing its hawkish stance anytime soon, in contrast with central banks elsewhere that are seen easing policy to counter the global economic slowdown, they said.
‘There are several risks for the RBI to lose sleep over,’ said Rajeev Malik, senior economist at CLSA in Singapore. ‘I think the RBI stays on hold on rates for the remainder of the year.’
India’s 10-year government bond yield dropped 8 basis points to 8.15 per cent after the data, while the BSE Sensex swung higher after the surprise data. One-year and five-year swaps rates dropped.
Inflation had stayed above 7 per cent for two-and-half-years, restraining the central bank from easing monetary policy too aggressively even as the economy slid in the January-March quarter to its weakest pace of annual growth in almost a decade.
It cut its policy rate by 50 basis points in April but has left it on hold at 8.00 per cent since. At its last review on July 31, the RBI said cutting rates would ‘aggravate inflationary impulses without necessarily stimulating growth.’
Central bank governor Duvvuri Subbarao said then that the rising momentum in core inflation was ‘disturbing’ and he maintained a hawkish tone on Monday, saying inflation was too high.
‘This data cannot be taken as evidence that inflation is coming down,’ said A Prasanna, an economist at ICICI Primary Dealership Ltd in Mumbai.
‘We still think it will be premature for the Reserve Bank of India to cut rates.’
July’s inflation was the lowest since November 2009.
Analysts had expected the wholesale price index — India’s benchmark inflation gauge — to rise in July by 7.37 per cent from a year earlier. Only two of 24 respondents in a Reuters poll published on August 8 had expected a reading below 7 per cent.
‘It is not yet at the level where one can say it has entered the comfort zone,’ Montek Singh Ahluwalia, deputy chairman of India’s planning commission, said of the data.
The pull back came after petrol and vegetable prices fell by nearly 4 per cent and 6 per cent respectively in July from June.
That pushed annual fuel inflation down dramatically to 5.98 per cent in July, its lowest level since December 2009, from 10.27 per cent in June. Food inflation eased to just over 10 per cent from 10.8 per cent.
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