The Consumer Price Inflation (CPI) has declined to a nine-month low of 3.8 percent in July due to lower food prices, widening the scope for the Reserve Bank of India (RBI) to cut rates at its September policy meeting.
A Reuters' poll showed that there is a 60 percent probability for a repo rate cut by the RBI at its meeting next month, compared to its previous poll that estimated a rate cut in the final three months of the year.
In the wake of inflation falling to record lows, some sections in the business community and the government including the Finance Ministry have publicly called for a rate cut, even though the RBI Governor Raghuram Rajan, who is known for his hawkish stance, still wants to see a sustained fall in inflation rates.
Stepping up the pressure on RBI to cut rates, Finance Minister Arun Jaitley said last week that "hopefully, the impact of inflation being under control is a factor which ... the Central bank, with all its wisdom, will take note of."
Responding to growing calls for rate cuts, Rajan said on Monday that "rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading. Instead, what is important is sustained low inflation. And rate cuts are a natural consequence that the RBI has no hesitancy in delivering," he said.
Rajan had kept the repo rate unchanged at 7.25 percent at a meeting on August 4. Overall, the Central bank had the repo rate by 75bps so far this year. At the August meeting, he had also pressed banks to pass on the benefits of earlier rate cuts to borrowers.
Analysts expect inflation to fall further in the coming months, owing to a slump in global crude oil prices to seven-month low in August, giving more for RBI to cut lending rates in September. But a recent rise in onion prices may start to weigh on food prices, driving the inflation slightly up. A depreciating rupee may also curtail the chances of RBI policy rate cuts in September.
Fading expectations for an interest rate hike by the US Central bank in September also increases the likelihood of RBI rate cut next month.