Stage set in India for rate cut in August, says ANZ

July 17, 2017

MUMBAI – ANZ Bank is tipping an interest rate cut of 0.25% for India at the Central Bank meeting in August, with inflation dipping to a series low of 1.54j% y/y in June. ANZ says that apart from the benefit of a favourable base effect, a key reason for the moderation is benign food prices.

In contrast to the customary seasonal pattern, food inflation has beencontracting due to favourable supply conditions on the back of a strong harvest.

“Good progress in the on-going South-west monsoons minimises the risk of a reversal in this favourable trend,” ANZ says.

It adds that falling inflation is consistent with on-going softness in a variety of indicators, including the PMI, bank lending, car sales and industrial output.

“Importantly, CPI inflation has moderated in every quarter since June 2016 and printed below the lower bound of the Reserve Bank of India’s (RBI) target range of 2-6% in June,” ANZ says.

“Having said that, inflation has probably bottomed out, and we expect a gradual rise starting July.

“The increase in housing allowance for civil servants, which directly influences the housing component of the CPI basket as well as less supportive base effects, will push inflation higher.

“The overall increase will, however, be limited by the strength of the rupee, lower oil prices, and a negative output gap.” (ATI).