July Industrial Output Seen Stable, Inflation to Ease Further: Poll

Consumer inflation was expected to have slowed to a record-low in August, hit by slack global energy costs and low food prices, a Reuters poll found, likely increasing pressure on the Reserve Bank of India (RBI) to cut rates at its meeting later this month.

The poll of over 30 economists, conducted this week, forecast inflation to ease to 3.6 per cent in August year-on-year, from July's already all-time-low of 3.78 per cent.

Signs of inflation cooling rapidly, from double digit rates almost two years ago, will likely increase calls for the RBI to cut interest rates at its September meeting.

Three cuts this year, prompted by low inflation and slackening economic momentum, have brought the key repo rate down to 7.25 percent.

RBI Governor Raghuram Rajan, however, has remained firm in his assertions the central bank will not act again until the full impact of the monsoon season - stretching from July to September - is known.

"This is the second year of drought or low rainfall conditions but food inflation has almost halved," said Bhupesh Bameta, economist at Quant Capital in Mumbai. "We've not had a sustainable period of low rainfall, so the damage to crops is not that high."

In July, retail food inflation slowed sharply to 2.15 per cent from 5.4 per cent in June, despite the country recording 13 per cent overall lower rainfall than average this year.

The forecasts for lower inflation were accompanied by predictions of steady factory growth in July, the same poll showed.

India's economy grew a historically modest 7 per cent last quarter but industrial output has generally been strong. It is expected to have increased 3.5 percent in July from a year ago.

"Month on month there is some volatility in the numbers but the broader sense of a gradual investment-led recovery is definitely visible," said Bameta.

Factory growth has been positive since November.

However, the possibility of higher interest rates in the United States is likely to weigh on Rajan's thoughts ahead of the RBI's September 29 meeting in which economists said there is a 60 per cent probability of policy easing.