India’s retail inflation surges in September, but rate cut hopes still high

 India’s retail inflation rose close to the central bank’s medium-term target of 4% in September for the first time in 14 months, but analysts still predict a sharp economic slowdown will prompt a sixth consecutive interest rate cut in December.

Annual retail inflation INCPIY=ECI rose to 3.99% last month, driven by higher food prices, up sharply compared with 3.21% in the previous month and higher than the 3.70% forecast in a Reuters poll of analysts.

Retail food prices, which make up nearly half of India’s inflation basket, increased 5.11% in September from a year earlier, compared with 2.99% in August.

Subdued inflation and an economic slowdown have allowed the Reserve Bank of India (RBI) to cut interest rates by a total of 135 basis points this year, including a 25-basis-point cut earlier this month, making it the most aggressive central bank in Asia.

The RBI said it expected inflation to stay below its medium-term target through to the early months of the 2020-21 fiscal year, while lowering its economic growth forecast to 6.1% for the current year ending March 2020, from an earlier estimate of 6.9%.

Economists said economic growth could fall as low as 5.8%, dragged down by a slump in consumer demand and investment, encouraging the RBI to cut rates for the sixth consecutive time at its next meeting in December.

Garima Kapoor, economist and vice-president at Elara Capital, said the arrival of the new crop in the market could ease food prices and so calm inflation, providing the RBI with the headroom to cut rates further.

“We expect the MPC (Monetary Policy Committee) to cut the policy repo rate by another 50 basis points until March-2020 with a 25 basis points cut in December,” she said, referring to the central bank’s benchmark interest rate.

Separately, figures released on Friday showed industrial output shrank 1.1% in August, the worst performance in nearly seven years.

Annual wholesale price-based inflation INWPI=ECI eased to 0.33% in September, from 1.08% in the previous month, while economists in a separate Reuters poll said the central bank was not yet done with rate cuts.

India’s unemployment rate was 7.16% in September, compared with 6.47% a year ago and 8.2% in the previous month, estimates from the Centre for Monitoring Indian Economy, a Mumbai-based think-tank, showed.

The next decision from the RBI’s monetary policy committee (MPC) is due on Dec. 5.

India’s passenger vehicle sales slumped 23.7% in September, the 11th straight month of declines, prompting an industry body to flag more job cuts if sales failed to pick up soon.

“All high frequency indicators of demand indicate soft demand conditions,” Kapoor said.