India CPI Unexpectedly Eases, Boosting Chances of Rate Cut

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India’s retail inflation unexpectedly slowed despite crop damage from unseasonal rains, boosting the possibility that central bank Governor Raghuram Rajan will cut rates outside the review cycle for a third time this year.

Consumer prices rose 5.17 percent in March from a year earlier after a 5.37 percent increase in February, the Statistics Ministry said in a statement in New Delhi on Monday. The median of 38 estimates in a Bloomberg survey of economists had predicted a 5.41 percent gain.

Rajan refrained from lowering borrowing costs at a scheduled review last week as he waited for commercial lenders to pass on two previous cuts to customers. He said his next move would depend on data showing the balance of risks to inflation, which he’s mandated to keep below 6 percent by January.

“All the signs are positive in terms of future decreases in interest rates from the RBI,” said Madan Sabnavis, chief economist at CARE Ratings in Mumbai. “A mid-term cut in the interest rate cannot really be ruled out,” he said, referring to a cut before the next policy meeting scheduled for June 2.

While India’s inflation has slowed from an average of 6.7 percent last year, its still the second-fastest in Asia after after Indonesia. The rupee extended gains in the offshore market to 62.75 a dollar soon after the data were published. The benchmark equity gauge closed 0.6 percent in Mumbai before the release and the yield on the 10-year sovereign bond was little changed at 7.80 percent.

Crop Damage

Unseasonal rains and hailstorms this year damaged crops including wheat, rapeseed and gram in 11.3 million hectares (27.9 million acres), Agriculture Minister Radha Mohan Singh said April 7. Wheat production may fall as much as 5 percent this year from a near-record 95.8 million tons estimated by the government in February, he said.

While the RBI can’t control food inflation, it looks to prevent it from spiraling, Rajan said on Friday. Consumer food price inflation eased to 6.14 percent in March from 6.88 percent the previous month, Monday’s data showed.

Rajan said in February that 1.5 to 2 percentage points is a reasonable real rate for India. According to the monetary authority’s forecasting model, consumer price gains will moderate to 4 percent by August due to base effects before firming up to 5.8 percent by March 2016.

Upside risks including a weak monsoon and a surge in food prices appear offset by global disinflationary tendencies and slack in the domestic economy, Rajan said last week.

While company earnings are bottoming out and industrial production accelerated in February, exports for the same month fell the most since 2009 and credit growth is at the lowest in more than five years. Rajan will lower rates both in June and August to address this weakness, according to Deutsche Bank AG economists Kaushik Das and Taimur Baig.

“Overall, the growth-inflation mix paints a picture which warrants further monetary policy accommodation,” they wrote in an April 10 report.

(A previous version of this story was corrected to say the statement was released on Monday.)

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