India Inflation Eases, Adding Pressure on Rajan to Cut Rates

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India’s inflation eased more than estimated, adding pressure on central bank Governor Raghuram Rajan to cut interest rates after China devalued its currency.

Consumer prices rose 3.78 percent in July from a year earlier after a 5.40 percent increase in June, the Statistics Ministry said in a statement in New Delhi on Wednesday. The median of 39 estimates in a Bloomberg survey of economists had predicted a 4.4 percent gain.

Rajan kept rates unchanged this month to contain Asia’s third-fastest inflation even as the government has pressured him to lower one of the region’s highest borrowing costs. Immediately after the latest inflation figure was released, a Finance Ministry official reiterated to reporters that Rajan must cut rates sharply.

“Chances of a rate cut have increased after this data,” said Prasanna Ananthasubramanian, chief economist at ICICI Securities Primary Dealership in Mumbai. He predicts Rajan will lower the rate one more time in the fiscal year through March, though not before the next scheduled review on Sept. 29.

Industrial production grew 3.8 percent in June, the Statistics Ministry said in a separate statement. That was more than a median forecast of 3.5 percent in a Bloomberg survey.

The Reserve Bank of India forecasts inflation will ease to 4 percent in August before rising toward its target of 6 percent by January. The projection hasn’t fully accounted for the 50 percent plunge in global oil prices over the past year, Rajan said on Aug. 4. He left the repurchase rate at 7.25 percent after cutting it three times this year.

Rate Outlook

The rupee gained in the offshore market after the data, with the one-month non-deliverable forward rising to 65.08 per dollar from 65.18. The onshore markets had shut before the release.

Most economists in another Bloomberg survey predict Rajan will maintain policy through this year with the U.S. poised to tighten. Swaps are pricing in the possibility of a cut to 7 percent.

Standard Chartered Plc and Barclays Plc say Rajan’s inflation focus, falling oil prices and a possible increase in U.S. interest rates this year will prevent him from depreciating the rupee aggressively after China devalued its yuan.

Food inflation is another risk. India’s monsoon rainfall was 9 percent below average since June 1. The Food Price Index rose 2.15 percent in July from a year earlier after a 5.48 percent increase in June.

“Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions,” Rajan said on Aug. 4 when he held interest rates.

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